To begin with, each startup should decide what do they need more to get their business off the ground – money or assistance and support? Or both?
Where to Get Financing for Your Startup?
It may happen that at the initial stage the so-called seed capital is provided by the startuppers themselves with a bit of crowdfunding. The seed capital is needed to finance the initial market research, preparation of the business plan and creation of the MVP or product prototype. At this stage, it is the most difficult to find investors for business, as seed investments are considered very high-risk. For this reason, startup founders try to get the first investment with own resources and start looking for investors when their business has taken a certain shape and there is already something «to show».
However, if your own resources are insufficient and your business needs financing to get off the ground, you should be looking for ways to get investors for your startup.
Angel Investors vs Venture Capitalists: What's the Difference?
Most startups obtain their financing from two major types of investors – angel investors and venture capitalists. They have a different approach to startup funding which can define both your choice of investor type and your strategy of attracting them. So, what's the difference between the two?
Angel investors are mostly individuals who contribute their personal money to support startups they find promising. Their primary interest is not only in receiving the return on their investments but also in wanting to keep the pace with the current trends and to share their expertise with younger entrepreneurs. Some angel investors are just passionate about the industry you are working in and want to be part of it. They are more willing to support startups at the very initial stages of their growth.
Venture capitalists, on the contrary, are companies and funds whose financial assets belong to other corporations or funds. In other words, they are responsible to their partners for the money they are prepared to invest into an idea, and this fact influences the approach they take to startup financing. Venture capitalists are more prone to invest in businesses which have already shown certain progress.
With that in mind, we can identify the following important differences between angel investors and venture capitalists which should be taken into account while looking for investors for your startup business:
- Because angel investors manage their own funds, they generally propose smaller amounts than venture capitalists. If you are planning to attract angel investors for your startup business, you should take into account that their maximum investment will be in the range of $100,000 – 200,000. If your project requires larger investments of several million, you should approach venture capitalists. Their average investment into a startup is about $5,000,000 – 7,000,000.
- Angels' risks are higher, therefore, they demand larger ROI than venture capitalists who face less risk investing in more or less established companies.
- Angel investors are willing to share their expertise and connections but may stay away from managing the company. On the contrary, venture capitalists demand seats on the company's board and insist on very strict terms allowing them more control.
To sum up, before approaching your prospective investors with propositions to support your startup, we recommend determining what kind of assistance you need, how much money you need, how much equity and control you are willing to hand over to your investors. Once you have made these estimations, you will form an overall idea of the investor's type you need for your startup.
How to Attract Investors for a Startup
This is a key question, because looking for investors is an investment in itself, as you should not come to them empty-handed. So, what does it take to convince other people that investing in your startup is worth their while?
- Start with a research of your own. Find out as much as you can about your prospective investor. This works well both for approaching angel investors and venture capitalists. Learn about their past investments, try to define where their interests lie, if possible, find out if they have invested in similar projects before. Of course, some information may be confidential, but it will be worth the effort to be prepared to meet your investor by learning their background. Besides, this may give your meeting a positive start by showing your investor-to-be that you are taking the matter seriously.
- Be realistic in your pitch. Approach the potential investor with a clear and well-grounded description of what investments are needed and for how long. At the same time, present an honest and convincing picture of how far your startup's progressed and what you've already achieved. The investor has to gain an objective idea of when their contribution can start bringing the return. Make a thorough business plan showing achievable goals and practical steps to reach them.
- Prepare a marketing research. To secure the investment, you should convince the investor that your idea is solving an actual problem and that there is a market for it. So, before talking to investors, we recommend making a small investment in a solid marketing research to lay the foundation for your pitch.
- Search at your level. If your business is in the initial stages, it's better to approach the persons and companies who have not reached the national or global scope. Smaller investors may be more likely to take the risk of financing a small startup.
- Be prepared to give the investor a possibility to participate. If you are planning to attract an angel investor, they can become your consultant, mentor or representative, in case if they have some useful connections for your business. A venture capitalist may claim the right to have a seat on the board of directors in return for their investment. When you approach the potential investor, you should be open to such offers and have a flexible solution.
- Show passion. It may sound a bit out-of-place in “strictly business” negotiations, but people, you expect to provide financial resources for your startup, need to see that you are taking this project seriously and that you are committed to making it work. However, passion must always be supported by facts and figures.
- Know your business. You should be able to answer any question about your startup, even if it is beyond the scope of your business plan. It is your business you are presenting, and there should be no subjects that you become confused or uncertain about.
- Learn from a failure. If your negotiations with a potential investor haven't materialized into an agreement, analyze what could be the reason for that. The investor's responses to your statements can give you the idea of what was accepted well and what caused some rejection. Such analysis will help you work out a better strategy of approaching another angel or company to support your startup.
This strategy may help you win the investor over to your side and to secure both financial support and valuable input in the form of consulting, experience sharing or introduction to useful connections in the business world.
Assistance and Support
However, at the initial stage startup may need another type of resources – those in the form of support. The young business may want some office space, technical devices, access to high-speed Internet, and there are solutions for that, too.
Coworking
Coworking spaces, which have rightfully earned the unofficial name of «space-as-a-service» are a great solution for startups to get the ball rolling. Although providing no financing and, on the contrary, charging a fee for their services, coworking spaces help to significantly reduce the initial startup costs.
Coworking spaces will save you the headache of renting an office space, selecting office hardware, contracting an Internet provider, arranging meeting spaces for negotiations with prospective customers and investors. Such facilities already have it all in sufficient amounts.
WeWork, a global coworking network which heads most coworking ratings, describes their service in the following way: «You focus on your to-do's, we take care of the rest». Indeed, you will find convenient space for your office with the necessary equipment and services, together with conference rooms, cafeterias, and recreational areas.
And the beauty of coworking spaces is that they are charging a monthly fee, so there is no need for long-term investments.
[Image credit: WeWork]
Business Incubators
Unlike coworking spaces, business incubators offer not only facilities and tools for running a business, but also a whole set of research, consulting and training services. There you can get a consultation on various aspects of business management – financial, legal, intellectual property, human resources, and much more. Incubators can bring you together with marketing experts who assist you in preparing a market study, trainers on management who help you set up your startup team, professional coaches who instruct you on the best practices of modern business.
Another great advantage of business incubators is that they can connect you with potential investors for your startup or arrange a bank loan if that is your preferred strategy. Some business incubators operate online only, providing no coworking services and focusing on consulting and facilitating instead.
Basically, the purpose of business incubators can be seen directly from the name – their goal is to help the emerging companies «incubate» their business ideas, nurture them into a prototype to attract investors, and, in general, to support an aspiring business until it spreads its wings. Business incubators can sometimes be part of government programs with government funding, while others are sponsored by venture capitals or large corporations.
An example of a business incubator is Idealab that searches for promising ideas and helps them become successful businesses.
Accelerators
They are one step up from business incubators, as this is where a startup can already secure certain initial investment. At the same time, business accelerators have some entry barriers and conditions which a startup must fulfill to qualify for the seed investment from the accelerator:
- Accelerator programs are open for all applicants, however, not all of them are selected. The acceptance rate of the best-known accelerators is no higher than 3%
- Accelerators are usually reluctant to accept individual applicants giving preference to startup teams. The general approach is that a team has better chances of starting a business than a solo entrepreneur
- Startups accepted for accelerator programs usually receive a small investment in exchange for some equity in favor of the accelerator
- Accelerator programs have a definite schedule, plan, and deadline. During the program, startup businesses are given intensive consulting, assistance and training and by the end, they should be able to present a demo. The demo is shown to businessmen, media representatives, and potential investors to make a decision on further investments into a particular project
Startups included in the accelerator programs benefit not only from mentoring they receive but also from the sole fact of being selected. Thus, a team aspiring for a program should present a truly outstanding application to convince the board that their idea does carry a real value.
Techstars is an US-headquartered global accelerator network with operating programs in Israel, Germany, South Africa, Australia, and others. In 2017 DA-14 CEO and Co-Founder, Dmitriy Sushko, took part in Techstars Boston as a Technical Associate to help startups build prototypes and automate business operations, assisted by remote JavaScript developers from the DA-14 team. Techstars has laid down some simple recommendations for startups hoping to be accepted for their programs:
- Apply early for the board to get to know the project and the team and follow their progress
- Show rapid execution by updating the application with actual achievements
- Prepare a short but impressive video and a concise description of the project
- Provide references and describe your team history and experience
- Demonstrate some personality to show that there are people behind the project
Basically, these recommendations can be useful for applicants for any accelerator program, as they are all about showing (and proving!) that you have a great idea and know how to bring it to life. There are many startup accelerator programs to choose from, so you can select the one which suits you best – Techstars whom we've mentioned already, 500 Startups who introduce themselves as a «badass, global family of startup founders, mentors, and investors», Y Combinator who pride themselves in supporting their graduates for the whole lifetime of their business, and many more.
On a final note, looking for investors is a difficult path where nobody is safe from failure. However, if you are well-prepared and determined, you will succeed in finding a person or company to finance your project. Then your startup success will be in your hands.