If you don’t know how the process works to raise capital and get funding from angel investors or venture capital investors, you will never succeed at raising capital. What this means is that if you feel like raising angel investment or venture investment is critical for the success of your business, you need to go out and learn how the process works. There are tons and tons and tons and tons of resources out there on this subject. Read them all. And then read more. It will take awhile, but it’s worth the time. Either you’ll realize that raising capital isn’t something that’s going to happen for you (or it’s not necessary or right for your business), or you’ll decide it’s absolutely the right thing to do and you’ll be better prepared to do so.
I get quite a few questions and requests for help in terms of how to raise financing. I don’t mind – I think it’s great that what I’ve written to-date on this site encourages people to reach out. But here are a few problems I see with most of the queries, and hopefully by answering all of these publicly it will help people in the future:
- Cold-pitching investors rarely works. This is really the same principle as cold-pitching prospects. What’s the percentage success of cold emails or cold calls? Most of the time it’s not very good. I’d have to say it’s even worse in the case of raising capital.
- Investors won’t sign non-disclosure agreements. This has been said before, but it needs repeating. No investor will provide you with a “guarantee of confidentiality”. It’s just not going to happen. So get out there and pitch the crap out of your idea. And hone that pitch until it’s perfect.
- Don’t try and raise money if “you don’t know what to do next.” Investors put money into the people first. So the most important thing in most investments is the people involved in the company. If you’re going to admit to an investor, “I need money because I don’t know what to do next,” you’re basically telling them you’re incapable of running the business. Money doesn’t provide all the tools to run a business, only one.
- Don’t try and raise money if you don’t know any investors. This is of course tied with point #1 above. The best way to raise money is to get involved in the local startup community, build up your own brand (and the brand of your startup) and connect with as many entrepreneurs and investors as possible. See point #3 too – Investors invest in people. So if they know you, like you, and trust you already, your chances just went up. You can get to investors through entrepreneurs (who have raised money), as well as service providers like lawyers and accountants who do business with the investors. You have to figure out the world of personal branding, social capital and leverage.
- Raising money can’t be a precursor to starting your business. It’s very difficult to raise money when you haven’t started anything. You should really be focusing on starting your business, testing your hypotheses, getting customers and key metrics that help validate what you’re up to. Then give it a try. If raising money is your first step, an step two is start the business, you’ve got the steps in the wrong order.
- Play your odds and be realistic. One of the key reasons why point #5 is so important is because so few deals are ever completed. Angelsoft has some great statistics on this: In the last 12 months out of 21,562 submissions to their system, 496 deals have been completed. That’s a 2.3% investment rate. So those are your odds. They might be a bit higher, but even at 3% your odds of raising capital flat out suck.
- Learn how to sell. Before you go to raise money do as much as you can to become a master salesperson. If you can’t sell and/or can’t effectively (and passionately) communicate ideas, you will have a very hard time raising capital.
The process of raising capital – from angel investors or venture capital investors – isn’t rocket science or a total mystery. Help is out there. There are some very clear things that you need to know, learn and understand as fully as possible before you even begin the process. The more prepared you are, the better your chances of success. Good luck!