July 26th, 2022 | By: The Startups Team | Tags: Funding
Continuing in Phase Four of a four-part Funding Series:
Phase One - Structuring a Fundraise
Phase Two - Investor Selection
Phase Three - The Pitch
Phase Four - Investor Outreach
Part 1 - Investor Outreach
Part 2 - Investor Introductions: How to Get Them ( ←YOU ARE HERE 😀)
Part 3 - The Investor Email Pitch
Part 4 - How to Contact Investors
Let’s dive in!
Before you try to connect angel investors or venture capitalists to secure funding, we want to ensure you are using the best possible inroad. That means before contacting a potential investor, we want to find the best way to make a warm introduction.
Startups sometimes forget that an angel investor or really any private investors are just regular people like us.
Their investment process starts with familiarity, just like any relationship. As an example, let's take a look at two methods entrepreneurs use to pitch potential investors and see why they are so obviously different:
“Hey Shirley, my name is Laverne. I’ve got a startup opportunity that I think you’d really love and…”
Venture Capital or Angel Investors generally read this opening and immediately gloss over the business pitch (even with a great pitch deck!) because the first thing they are trying to do is qualify the entrepreneur personally.
That's no different than anyone else getting a random email and first trying to understand who the sender is. We have to treat our venture capitalists with a little more love!
Now let's try to pitch our friendly venture capitalist again, but instead, we'll open up with some familiarity first:
“Hey Shirley, I was speaking with our mutual friend Fonzi who suggested we connect. I've got a startup opportunity..."
This is the same startup pitch with a very important twist - establishing rapport by showing a mutual connection. Among potential investors, this is known as "social proof" which is really how we want to find investors to who we have some connection to.
Keep in mind that angel investors and venture capitalists are getting hundreds of startup pitches every month, so their first line filter is social proof. That mirrors how we all filter our communications every day.
Of course, you're probably thinking, "I don't personally know any private investors which is my whole problem!" That's OK. We want to establish common ground, and that doesn't have to be a personal connection to our startup company per se. There are many ways to find investors you have something in common with.
Let's walk through the best way to find investors that you may have common ground with versus other investors that may sound like the right match on paper, but don't give us an immediate in-road to start a conversation.
Venture Capitalists and Angel Investors live by their relationships. While it’s true that every now and again a totally cold lead will turn into a venture capital investment, it’s also true that every now and again someone wins the Powerball lottery. We don’t want those odds as part of our business plan!
Unlike getting business loans for a small business, which is based on a standard bank loan process that involves underwriting and collateral, investors invest using a mix of experience, instinct, and emotion. The emotional component is largely driven by
FACT: 87% of Active Investors indicate they source their early-stage company investments through their trusted connections.
Instead, we want to attract investors by doing everything in our power to find some connection back to that investor, whether it’s as basic as a shared interest (college alumni, favorite hobby) or as direct as a close colleague that you both know. This isn't like securing funding from a small business administration loan! This takes real chutzpah. Not that getting a small business loan is easy, but it's a far less complicated process.
WARNING: Before you throw your hands up and say, “Hey this sounds like a lot of work! I don't have any personal connections to the right investors!” stop right there. We’ll work on methods to address that concern, but just cold emailing investors isn’t the answer. Step. Away. From. The. Keyboard!
We promise you that every startup Founder starts with this issue, even those that may get into popular accelerator programs, leverage online platforms, or have a previous track record in their industry. But there is a very specific process to getting the right investor to pay attention!
The single best investor connection you can make is through a trusted connection. Even if the connection to the investor is a bit distant, it’s still the best inroad. No matter what the product or service we have to pitch is, potential investors are going to look at who is pitching the startup before they consider anything else.
You’ll want to work backward from who the potential investors know, not who knows the investors. Start by researching the investors on Linkedin, Facebook, and Twitter, looking for any references to “mutual connections.”
Write down who those connections are. You’re going to start reaching out to your own connections first in order to ask them to make the introduction.
Of course, having a connection doesn’t necessarily mean someone is willing to make the connection for you. There’s a concept called “Social Capital” and it refers to the equity built up between a person and their social connections.
If you ask someone to make an introduction for you, you’re asking them to spend some of their social capital with that connection. Why? Because your friend is going to burn up some built-up trust is essentially asking the investor for a favor on your behalf.
As such, just be mindful when you’re asking for connections that it’s more than just them sending an email on your behalf, it’s them burning up a favor between their social connections – and that has a real cost.
In some cases, if you can’t find a personal connection, you may be able to lead with a mutual personal or business interest.
If you’ve both attended the same college that’s always a huge plus. People tend to have a familiar interest with those that have spent the same four years together. Of course, that’s not limited to college. That could also include the military or other programs where there is a strong shared interest.
“Jane Investor, I saw that you and I are both proud alumni of THE Ohio State University (Go Bucks!). I wanted to see if you’d be willing to chat with a fellow alumnus about a startup I’m working on …”
Investors tend to be fairly parochial, so letting them know up front that you are “in their neighborhood” (if it applies) can be helpful.
It lets them know that you share a love for the area as well as the fact that they wouldn’t have to travel far to spend time with you. Alternately, mentioning that you’re both from the same hometown or home state, can at least be an icebreaker.
“Jane Investor, I was happy to see that you and I both enjoyed the beautiful Fall in Southern Connecticut growing up. I was hoping that two rare East Coasters in San Francisco could chat about a startup I’m working on…”
If the investor has put money into a company that is in a similar space (but obviously not competitive) to your company, that would certainly help. At that point you know they have a strong affinity for your market to the point where they’ve written a check. (Funny side note here: sometimes that can be negative if the company they invested in has done poorly, so do a little homework on the portfolio company if you can to see if anything would indicate the contrary). A Crowdfunding platform like Fundable.com can be a good way to find investors who have made investments in similar companies through equity crowdfunding.
“Jane, I saw that you’ve been an important part of XYZ’s incredible growth and wanted to see if you’d be interested in talking about my startup which plays in a similar domain…”
Everyone loves a little adoration for themselves. Letting an investor know that you too are Faboy/girl helps show that you’ve got some respect for their work.
These days investors can be found everywhere espousing their opinion or being helpful, from social media to video interviews to lectures.
Take the time to digest some of their material and cite it in your intro. People genuinely appreciate having their work consumed and reflected upon them in an authentic way.
“Jane, I’m a big fan of your blog series “How to Structure a Funding Round the Right Way.” I actually read it twice and took copious notes because it fundamentally changed the way I’m structuring my own raise. I’m hoping to get a little bit more of your feedback directly as I’m putting a round together for my startup…”
Your connections don’t need to be limited to these categories – get creative here! What matters is leading your own introduction with a notion that you’ve paid attention to what matters to them, not you.
The connection doesn’t need to be more than a few sentences, but it needs to grab their attention compared to the 100 other pitch emails they will get today from Founders who spent zero time doing their homework!
Now it’s time to start ranking your prospects based on how well you know them. There’s a small bit of variance here, but you’re going to have the most luck with personal connections and the least luck with vaguely shared interests.
If you know any investors, even vaguely, this is always your first ask. The exceptions here may be if the investors you know are just a really bad fit for this type of business investment.
Note that sometimes what will work is using those personal connections to do a few “practice pitches” before you hit your higher value targets. This can provide some early feedback that you will need to refine your pitch without the consequence of losing your most likely prospects on a “rough pitch.”
Anyone you have a mutual connection with should come next. The reason is that these are the most likely places where you will get a response at. You may think “well the person I really want to meet with isn’t through a mutual connection, and they are my top choice!”
That’s wonderful, but this isn’t a college application process where everyone has to consider you. Unless you can get a meeting, your preference for investors doesn’t really matter.
Shared interests are the best way to launch into a cold email or phone call, but they are still cold calls. The likelihood of connection drops precipitously when you don’t have a personal connection to drive the response.
If all other methods fail, and you have no personal connections, you should absolutely rely on shared interests as a lead, no matter how subtle. But save these contacts for last as they are the least likely to yield a response.
There is a bit of an art to asking for a connection. As we stated earlier, asking someone for any kind of favor is asking them to spend some “Social Capital” on behalf of your startup. Therefore if you’re going to ask for a favor, there are some best practices here that lead to more consistent outcomes. For the purposes of this explanation let’s call your friend the “Connector” and the person you want to meet the “Investor.”
You want to make the Connector a hero. To do that, you have to think “what will make them look good in front of the Investor? In some cases, you may come up with nothing and that’s OK. But try to think of why Investors seeing your deal would be compelling to the Investor. Whatever is compelling to the Investors makes the Connector look like a hero.
“Joe Connector, I’d really appreciate an introduction to Jane Investor. I saw that she has been investing heavily in cryptocurrencies and our new startup specifically addresses one of the biggest problems in that space, which is how to guarantee transactions. Even if she isn’t interested in our company, I think she’d appreciate absorbing what we learned by digging deep into this huge challenge.”
In that example, you’ve focused on telling the Connector that if they make this introduction, the Investor will get access to valuable market information they may not have had before.
Now Investors may not care about that information ultimately, but you’re at least providing some value that the Connector can exchange with the Investors to make the favor seem more balanced.
Make the Connector's job easy. At the bottom of your email where you ask for a favor, include the actual investment pitch text you want them to send to the Investor. What’s important about this pitch text is that it’s brief, and it comes in the voice of the Connector, or if not, in a 3rd party voice as if it’s talking about your company.
Remember to stick to your Elevator Pitch fundamentals of focusing on the Problem, Solution, and Market size. Beyond that, any traction you have or critical credibility indicators goes a long way in improving the optics of your business.
“Netflix helps consumers combat huge cable bills and limited entertainment choices by providing thousands of popular TV shows and movies for less than $15 per month. Over 50 million U.S. households subscribe to cable TV with an average spend of $80 per month for a fraction of the choice. The company is in beta test with over 5,000 homes.”
A “seasoned” Connector may wordsmith that a little bit, but it’s 100x easier to edit some text than to write it from scratch. Make sure the copy you’re using is very matter-of-fact and not “salesy” as you don’t want to make the Connector sound like they are trying to run a sales pitch by their friend.
Your Connector may have some information about the investor you’re looking to connect with that is incredibly valuable. Instead of simply assuming that you know all there is to know about this investor, include a line asking what else they may know that could be helpful in your quest.
“Joe (Connector), if there is anything you know about Jane Investor that would be helpful to know before I reach out, I’d love to hear it.”
If you don’t prompt your Connector there’s a great chance they will never think to inform you. By asking a simple question you could unlock all kinds of valuable intel, from what deals they have done before (that you didn’t know about) to the fact that they stopped writing checks altogether 2 years ago!
This is just good karma, but if someone does you the favor of making a personal introduction, find some simple way to return the favor, even if it’s as simple as a hand-written ‘thank you’ card. Sending an email that reads “Thanks!” is a cop-out. Nothing is cooler than seeing some unexpected token of appreciation from someone who you helped out. It just makes the world a better place.
Following all of these “best practices” doesn’t guarantee you an intro, but it sure does help improve your odds, and amongst connectors, it’s considered the most common practice.
Continue to Part 3 - The Investor Email Pitch