Develop a better understanding of your business, of your future goals and of your needs. Knowing yourself is crucial before even considering an investment!
Make a choice for the type of investment you need and the type of investor you want to attract. Here is your chance to get strategic about your funding!
Become really concrete and specific about your offer to and expectation from an investor. Start working out your investment proposition and start researching which investors fit your profile!
1. What are your strengths and weaknesses on (adopted from Erwin Holtland, 2015):
a. Funding: Your business plan, revenue model and financing strategy.
b. Idea: The value proposition, intellectual property, and market opportunity and validation.
c. Team: The skills, roles, expertise and entrepreneurial experience your team members possess.
2. Are you investor ready?
a. You can use the Golden Egg Check to find out!
3. What are your key metrics (adopted from “wework”, David Ehrenberg) regarding:
Is your business scaling or projected to be scalable? How have your sales developed over time? How much does each customer contribute to your revenue?
Do you already have a solid client/user base? How profitable are your customers for you? Do you have multiple sales channels linked to multiple customer types?
c. Financial Management:
a. How much cash does your business spend every month (burn rate)?
b. Is your operating ratio low enough to be efficient?
c. What is the value and trend of your gross margin?
What is your exit strategy (adopted from “Entrepreneur”, Stever Robbins)?
Lifestyle business: Doing business to finance a lavish lifestyle.
Liquidation: Closing the business, repaying creditors and dividing the remaining funds amongst shareholders.
Friendly sale: Selling the business to a friendly buyer, an employee, a manager or a family member.
Acquisition: Selling your company to another company.
Initial Public Offering (IPO): Offering your company’s stock to the public stock market.
Do you want to stay on as your company’s CEO or are you more of a serial entrepreneur?
Does your potential investor have a focus on your business’s sector?
Based on your current weaknesses and future plans, what expertise or contribution (beyond money) do you need from your investor?
What are areas in building your business that you could use help with?
1. How much money do you need and for what exactly?
For instance: We need €50,000 for building a prototype, or we need €200,000 for starting mass production of our product.
2. Do you have your sales projections justified using various factors?
3. Can you split up your total investment need into milestones for your growth?
1. What are the funding criteria most significant for your company?
a. What is the urgency of your investment need?
b. What investment amount do you need?
c.Do you want to retain your company’s ownership?
d. What is your business’s sector and which location do you operate in?
e. Look back at your smart needs.
2. Consider startup financing stages to identify your company’s current stage, your current investment requirement and your future plan.
3. Based on your needs and funding criteria, which investment type fits you best?
Here’s a primer on types of startup funding.
- Launching customer(s)/client(s) (get funded from customers)
- Bootstrapping (an overview)
- Crowdfunding (complete guide)
- Basic debt
- Convertible debt
1. Based on your investment needs and preferred investment type, which investor type(s) would suit you best?
- Venture Capitalists (VCs)
- Angel Investors
- Crowdfunding platforms
- Strategic partners
- Potential clients
- Friends and relatives
- Government bodies
2. Consider the basic concepts of startup financing and the pros and cons of the various funding options that suit you, before making a shortlist of potential investors.
3. The table shows the typical linkage between investment and investor types. Exceptions are always possible. E.g. You can have VCs offer convertible loans, and you can have a friend take on equity in exchange for capital.
- Remember, you don’t have to just choose one investment type: Combinations are also possible and you can be strategic about such combinations. For instance, choosing an angel investor who has links to a potential client for your business; the angel takes up equity in return for an investment, but he/she also brings in a launching customer, market awareness and revenue.
|Investment type||Investor type|
|Revenue||Crowdfunding platforms, strategic partners, potential clients, friends and relatives|
|Debt||Banks, (convertible loans through investors also possible)|
1. What is your specific offer to this investor?
2. How do you add value to their business?
3. How does your company fit into your investor’s business model or their portfolio?
4. What is your potential return on investment (ROI) for the investor? But also, how fast can you create that return?
- How fast you can create return, of course, depends upon how far your product is from the market and from its full development.
- Be aware of both your best case and the worst case; be prepared to show what your “fallback scenario” looks like.
1. Consider your smart needs and ownership preference: Do you want something more than money from your investor?
2. What kind of role do you want this investor to play?
a. For instance, maybe you want an investor who has access to the US market, or maybe you want an investor who can attract solid technical talent to your team.
1. What terms are you willing to accept?
2. How much money do you need now and for your next round? What is your current (and projected) valuation? What equity or conditions are you offering in return? (Refer back to the needs you defined earlier).
3. What milestones can you present?
4. Do your preferred terms align with your investor’s typical terms? And do they conform with the market standards of your location?
a. The market standards of the Netherlands, for instance, can be gauged by researching what investment amounts are typically offered by Dutch investors, what ROI is usually expected, how much risk aversion is prevalent etc.
1. What do you know about this investor’s offerings and portfolio?
a. Is the investor well-reputed? Is the age of the investment firm young enough for it to be sustainable for your business growth? (You should avoid an investor that is nearing the end of their investing term; as that creates unwanted haste, less commitment and less focus towards attracting further investments for your company.)
2. What is this investor’s sector of focus and their mandate (the typical stages of companies they invest in, the nature of products they invest in, the locations of startups they prefer to invest in etc.)?
a. Knowing about the investors of your investor can help in understanding your investor’s mandate. E.g. a public fund (whose investor is the government) will more likely have a mandate for investing in technologies and companies that boost the local economy.
3. Is this investor interested in your company or just the deal? Can they later attract further external investments to your company?
1. Do you know this investor’s typical terms? Have you considered the concepts underlying a term sheet they could offer?
a. Have you researched how they carry out their due diligence and how long that process usually takes?
b. Take initiative in the process of drafting the term sheet; it could improve the deal you get!
2. Have you checked for killer terms? Are you taking on too much risk for your company?
3. Are you giving away too much equity at an early stage of your business?
a. Be cautious; this could limit your potential for scoring future investments and could hinder your further growth.
4. What documents do they typically require? Are you able to show them how your business has the potential to mitigate risk for them?
1. What kind of role does this investor want to play in your company? Do they want to advise, be actively involved or just want to be passive?
2. Does the investor offer sufficient added value (beyond capital) for building, supporting and/or scaling your business model?
3. Have you checked the investor’s track record concerning the extra value they offer? Have you checked how many successful exits they’ve been able to orchestrate?
a. It can be a good idea to talk to some companies in your investor’s portfolio; they can give a good impression of your investor’s track record in creating value and incentives for the portfolio companies.