If you are trying to get your company funded, it is helpful to try to get inside the heads of your potential investors. Each person you approach, whether a friend, a family member, your dentist, or an angel investor, has plenty of opportunities to invest money.
Consider your competition for their investment dollars. Even though bonds are not paying much they represent relatively safe investments. The stock market is reaching new historical highs. Startups and existing companies are aggressively pursuing investor dollars because banks are not lending easily to small business. In addition, banks, insurance companies and other financial services firms have created a plethora of new investment products promising attractive returns. Not only that, many people are spending their extra money helping to support relatives and friends hard-hit by the Great Recession.
The investor’s dilemma. With interest rates at record lows bonds do not yield much return. The stock market is feeling toppy and our political system is producing more confusion about the future, leading many investors to focus on keeping their money safe rather than investing for total returns. Also, during boom times, investors look for investments that will either provide big returns or good tax write offs. During lean times incurring losses to provide tax write offs is something most investors try to avoid.
The entrepreneur’s dilemma. You need money to start and grow your business. To get that money you must convince a potential investor that investing in your company is a safe investment that can return significant income and /or profits. Many investors are seeking income in the form of interest, dividends, or royalties for their investment money. Equity in your company may not be enough to attract money. No matter how much of a sure thing you think your company represents, the brutal facts are that a majority of startups fail in the first year and many of those surviving fail in the second or third years. Face it, an investment in your company is risky.
What to do. There are two things you can do to improve the chances of getting investment in your company:
First, eliminate as much risk as possible. This involves scrutinizing every single one of your assumptions for delusional thinking. Figure out ways to bring immediate revenues into the company by selling basic products and services, and try to get letters of intent from potential customers. This dramatically reduces the risk of investing in your company. If you can bootstrap the launch of your company based on revenues from basic, less- disruptive services or products, you will create a proof of concept that may attract investors.
Second, don’t think of investment money as free. Approach your presentations to potential investors from a win-win mindset. If you have already created revenues in your company consider offering modest shareholder dividends or issuing debt that can be converted to equity.
Above all, ask your potential investors what they would need from you and your company to make them more likely to invest.