How do you get investors to trust you?

For any investor to invest in a startup, they need to have a lot of trust given the scary statistics on how many startups fail.

You can even divide this trust into two things the investor must believe in: trust in the business opportunity (that the problem you are trying to solve is real, that the market is big enough etc.), and trust in your team (that you have what it takes to deliver on the opportunity).

But there is a big difference between early- and late-stage startups when it comes to how trust is generated. 

If you’re a late stage startup, you have a product, users, paying customers and revenue, and a team that have delivered the above. What this means is you have a lot of historic data, that is both quantitative and qualitative, to support your claims. You are able to provide credible answers to tough questions like: What is the cost of getting a customer? How much are they willing to pay? and How big is the market? Real data beats every scenario analysis there is. If you have customers paying, that is proof – and proof generates trust. Of course, they still have to have trust in you and the team, but it’s relatively easy to convince investors about the business because you have real data.

But what about an early-stage startup? You might have a beta version of the product, maybe you have some users, but you probably don’t have paying customers yet. You’ve hopefully convinced a few people to join you, but it’s likely to be an incomplete team. You have very little performance data; it’s all about the future. You’re saying, ‘I think there’s a big market; I think my customer would pay for this cool product if I made it.’

Early-stage startups should of course explain the business and market opportunity, but it’s really 80 per cent about you and 20 per cent about the business.

If it’s all about trust, how do you get early-stage investors to trust you?

There are two different types of investors: those you already know, and the rest. Perhaps you have an acquaintance, or friends and family, who know you and have the means to invest in you. Great, they know you and therefore trust you (and, if they don’t trust you, perhaps you should look in the mirror). Most startups will have to go beyond their personal network and approach investors they  don’t know at some point. When they do, they will need to build trust. The key point here is that trust is built over time. You’re unlikely to trust a person you have met for half an hour. This explains why you can’t expect to get the money on the same day
you meet a potential investor – there’s no personal trust. Even if they think you’re cool, feel you have what it takes, and you have a great business, the chance you’ll get money the same day or the day after you meet is tiny.

Entrepreneur turned venture capitalist, Mark Suster, from Both Sides of The Table, said, I don’tinvest in a dot, I invest in a line.

Imagine yourself as a dot on a graph with performance on the y versus time on the x. Even if your performance at a given time is good, investors want to see a line so
they can see you at different points in time. Investors look at entrepreneurs they heard about six months ago who had great plans for the future, and when they meet
six months later they may see they’re still not quite there yet but the line is going in the right direction.

As Lars Andersen, General Partner in SEED Capital, explains: The most common mistake startups make in relation to contacting VCs is that they make contact too late. Seriously, it’s about sticking your neck out there. Your product doesn’t have to be perfect. Build a minimum viable product, use it to learn about your customers, and start contacting VCs. We might say that it’s still too early, but that doesn’t mean never. The now successful wine scanner app, Vivino, had a first productthat was absolute crap, but they gave us something to work from.

This creates a paradox for many startups. You should not count on VC money too early since in reality they invest rather late in the process, but you need to begin building relationships with them early on. They need time to get to know you before they invest their money – just make sure you don’t waste too much time
on coffee with VC partners!

 

What does this mean to startups? You have to build relationships with potential investors before you need the money – you shouldn’t wait until you have everything in place. Create relationships now.

How to contact investors – do I need to write a business plan?

A common mistake is for entrepreneurs to send their 50-page business plan to multiple investors and then sit back waiting for them to call and invite them to pitch. But before you send out any material, you need to get the trust of a potential investor. They get hundreds, if not thousands, of contact requests a year. Every entrepreneur thinks they have the best idea or they wouldn’t be doing it. But why should a busy, time-strapped investor speak to you? What’s in it for them? In this blog post you will learn how to approach potential investors, and why you shouldn’t send them a business plan.

Rule number 1 – Don’t write a business plan!

Many entrepreneurs believe they should write a long and well-articulated business plan, setting out in detail all their future plans, and that the business plan is key to funding. Wrong. If you send a long business plan to a professional investor I can guarantee they won’t read it – and for three reasons:
1 It’s too long
2 It’s full of irrelevant details
3 It’s out of date

1. Too long

Investors won’t allocate time to read a 50-page business plan, especially not early in the process when they’re mainly looking to weed out unsuitable opportunities. They get so many opportunities that they must be able to evaluate yours in three or four pages. If you send them a long business plan, they might read the first five pages to see if it has an executive summary and they won’t read the rest. Danish venture capitalist Nikolaj Nyholm works as a partner in Sunstone Capital. I once asked him what he does when an unsolicited, long business plan is emailed to him. He said, ‘It will most likely rot to death in my inbox.’

2. Irrelevant details

A business plan is often full of irrelevant information. When you write it, you’re caught up in explaining a lot of details about the future – many of these are of limited interest and value to a potential investor. When you try to estimate your rental costs in three years, or whether in five years you’ll go into other territories like Germany before Spain, you will lose them. They know the plan will change many times before then. What investors are looking for are specific elements of the business model: the problem you’re solving, how you’re solving it, who your customers are, the team, etc. They don’t want to play the needle in the haystack game, trying to locate those five or 10 useful pages among dozens.

3. Outdated

The problem with a lengthy and detailed plan, with graphs of your cost of business and your market penetration guesstimates for year five, is that it’s outdated as soon as you press the print button. Perhaps you assume that your customers will pay €10 and they’ll be in Europe, and then you launch and find out that the  customers won’t pay €10 and they come Just ask the founders of some of the most successful startups what their initial business idea was, and you’ll find it was very different from the business they are running now. Investors know that and therefore won’t spend hours reading your lengthy plan.

Should you ever make plan for internal use?

Should you write a business plan just for internal use? Most serial entrepreneurs acknowledge that there’s real value in planning and thinking about the future, in thinking about what they really want to achieve and how they want to solve a problem. Winston Churchill famously said, ‘Plans are of little importance, but planning is essential.’ The value for me and most serial entrepreneurs is not the business plan as a document, but rather the process of making it. You and your co-founder(s) will learn a lot from discussing the really important subjects about the business; the where, what, how, who, why, and when. What you find will have important implications both for your business and for your funding strategy. Planning and strategizing is essential for determining and aligning you and your team to
where you want to go. The question is: what is the best process for you internally to get that alignment? Is that a business plan or is it a different kind of process? My opinion (which is echoed by many investors and serial entrepreneurs) is that you need a more agile process and documentation than the classic business plan approach offers.

What material do I need instead of the business plan

In short you need:

  1. A one-pager – called the executive summary
  2. A presentation – a PPT/PDF presentation with approximately 15 slides  describing your business in more detail
  3. A budget –       financial calculations supporting the conclusions in the presentation

 

How to make the one-pager (executive summary) will be the topic of my next blog post

How to get funding for your startup

Presentation on how to get funding for your startup

In September 2017 I gave a presentation at Loftet Studentincubator (student-run incubator) in Oslo, Norway on how to get funding for your startup.

My advice to the students can be summarized in the 10 step method to finding investors for your startup:

  1. Always start with bootstrapping and team-creation!
  2. Investors invest in different phases – in which are you?
  3. Which risk/reward are you offering?
  4. Do you really have a VC case?
  5. Prioritize your investor search (know you/know industry)
  6. Get introduced by mutual contacts
  7. Understand what is the investor searching for
  8. Don’t write a long business plan!
  9. Find investors that are not famous!
  10. (The secret 10th step)

You can download my presentation from the event via the following link: How to find investors for your startup.

Sharing is caring 🙂

Nicolaj Højer Nielsen

 

Investor material for early-stage startups

Yesterday (May 10 2017) I held a workshop at the PODIM conference in Maribor, Slovenia. Topic of the workshop was which type of investor material do you need to attract investors for a early-stage startup.

My main points regarding investor material are:

  • Investing in early stage startups is all about personal trust. Your startup don’t have that many data to show, so investors are mainly betting on the team/you. This means that the most important thing to convey in the investor material is that your team is world-class!
  • The three most important things when reaching out to potential investors: 1. Get introduced by mutual contacts, 2. Do your research and contact the relevant investors and 3. Be specific when contacting them (don’t just ask for coffee).
  • Regarding the need for introductions: All well-connected early-stage investors are getting a lot of requests per year – up to +1000 a year, but invest maybe in less than 10. This honestly mean that it’s really hard to get their attending if you are just cold emailing them. To stand out you need to get introduced via mutual contacts. This increased the chance that the investors are taking you seriously a lot!
  • Who are the investors relevant for YOUR startup: 1. Investors that invest in the same risk/reward matrix your startup is current in, 2. Investors that are interested in your industry (and understands it) and 3. Investors that invest in startups that are in the stage your company is currently in.
  • Do you really need a business plan ? I (and many other seasoned investors) don’t like business plans, because they are too long and often outdated. But this is really culture-dependent: Investors in some countries/regions still prefer along business plan. Check out what’s the status in your country before wasting too much time writing one.
  • What you for sure need in your dialogue with potential investors are: 1. An intro email (as explained above), 2. An executive summary (the 1-2 page “teaser” describing your startup very briefly) 3. The pitch deck (the typically 15-slide PowerPoint presentation that replaces the long business plan) and 4. The budget.
  • And please, don’t ask the potential investor to sign a Non Disclosure Agreement (NDA) before even meeting them. You first need to get them interested in your case (by disclosing non-confidential information), and most professional investors (business angels and VCs) will not even sign NDAs later in the process.
  • Ps. do you really need money from investors to grow your startup? And if you do, do you need them now or can it wait until you have more traction? The first money you take from investors are very expensive (due to a low valuation of your company)!

Feel free to download the presentation here.

Best regards,

Nicolaj Højer Nielsen