Startups search for the right investor and investors are always on the lookout for that one big fish. A matter of 1+1=2, wouldn’t you say? But investors always complain about the lack of interesting business propositions. And a lot of startups argue they really can’t find funding. How is that possible? In this article I give eight reasons why startups and investors find it hard to connect.
A different language is quite difficult to understand, and that doesn’t only apply to languages and dialects. Startups and investors also have a completely different understanding of the world. You want to succeed in life with your business, they want ROI. Not to speak of other investment terms as exit strategy, due diligence, multiples, escrow and IPOs. But as a startup it’s good to express yourself in another language to make that personal connection. So visit an investors meeting, do that online crash course or place yourself in the position of your future Business Angel.
400. That’s the average number of proposal a business angel or venture capitalist gets. Their challenge is to pick out that one, maybe two, that will go through the roof. If you are aware of that, you might have different expectations when you get into contact. And that rejection might feel a lot less painful.
- Scalable is fundable
Equity investors focus on growing company value. Companies they invest in ideally grow with a rate of 20% per year. The value increase from the moment they buy to the moment they sell is what gives them return on investment. Is your company not that scalable? Or don’t you expect to reach those growth numbers? Then a business angel or venture capitalist might not be the best source of funding for your business.
- Warm first contact
Reaching out to investors can be done in different ways. Cold calling, via the network, or the investor can find you. And the way first contact is made is important, because research has shown that meeting an investor via the network offers the highest change to make a deal. The chance to find an investor after cold e-mailing your pitchdeck is close to zero.
Is your startup not in the same sector as your investor. Then you are one point behind. Most investors are business owners themselves or have been. They have expertise, experience and connections in a certain sector or market and want to invest in a business that closely resembles what they know to reap their strengths. Are you doing something different, than your proposal might not be for them. But that does not have to be the end of it. All investors are connected one way or another. So if he likes your vision, he might bring you into contact with other investors.
A one hour drive, maybe one and a half. Thats the longest active investors want to travel to visit your business. If they visit your company every other week, they don’t want to drive for hours and hours. Ok, in the Netherlands this might not be such a problem. But one and a half hours is considered the maximum, otherwise no deal.
- Amount and investment round
The rule of thumb is that Business Angels invest between €50.000 and €250.000 and Venture Capital Funds from €500.000 upwards. Also the stage of your business and investment round matter. Without a working wireframe or prototype and a first customer, you are not ripe for investment.
Investors come into a range from very passive to very active. Whilst passive investors only commit capital and hardly get involved in the company, active investors preferably sit in the drivers seat. As a founder it can be hard to deal with someone who wants to be involved in day to day operations and have a say in decisions. So it’s good to think about what you prefer, before you make a deal. During the Amsterdam Capital Week we’ve asked a number of startups whether they thought about the different between active and passive investors, and what they prefer.
- Finding the right piece of the puzzle
There is hope. There is more than enough capital in the market and for (almost) every investment goal is a financing product. The business finance market has massively diversified in the last years. The problem now is to find the right one. As it is also on the balance sheet, assets vs liabilities. A new building or a machine is financed with a mortgage based loan or leasing. For R&D and growth, subsidies, business angels and venture capital are your best options. Suppliers can be best financed with factoring, and the 30 or 60 day payment period is best funded by invoice finance. Get some good advice if you want to achieve a good mix of financing for your company.
The Netherlands Chamber of Commerce is one of the main partners of Amsterdam Capital Week. With a series of blogs I, Martijn Lentz, entrepreneurial finance expert at KVK, share my lessons and pitfalls on how to get funding for your startup.