July 26th, 2022 | By: The Startups Team
Welcome to Phase Four of a four-part Funding Series — all about Investor Outreach:
Phase One - Structuring a Fundraise
Phase Two - Investor Selection
Phase Three - The Pitch
Phase Four - Investor Outreach
Part 1 - Investor Outreach ( ←YOU ARE HERE 😀)
Part 3 - The Investor Email Pitch
Part 4 - How to Contact Investors
Let’s dive in!
Investor outreach strategy is an art form. Many founders will think about their investor outreach program as simply "carpet bombing" prospective investors with the same company story — which never, ever works for startups.
Instead, let's talk about how to build any investor outreach strategy that is customized toward highly specific target investors in a way that will make our outreach efforts pay off.
The fundraising process for most startups is essentially the same if you're going to raise capital from institutional investors (anyone in the venture capital industry) or angel investors (high net worth individuals). Here's how we'll break down our investment strategy with new investors:
Like most, you probably have never been through the funding process before (why would you?) so we’ll give you the full tour. We’ll walk you through each of the critical steps of the investor outreach process, from the initial Email Introductions to potential investors to the Investor Pitches to the final Term Sheet and close – and give you advice on how to approach each step of the funding round.
Chances are your management team doesn't know any potential investors directly, but that doesn’t mean you can’t do your own research to make different types of personal connections back to your target investors. We’ll start with how to find mutual connections with the right investors and then work toward other inroads, including mutual interests that can make the difference between cold email outreach (read: no response) and warm introductions that get the discussion going with the potential investors.
Creating the perfect email pitch is about distilling the elements of your overall pitch (market opportunity, financial model) into just a few choice sentences. We’ll dissect each line of the pitch to give you a deliberate framework that you can build your own pitch against so that you hit each high point right on the nose with the right investors. This is NOT intended to be machine-gunned out as cold emails.
Once you’ve done your homework, it’s time to begin investor outreach. We’ll show you how to take baby steps toward contacting potential investors so that you can reach out, gather some feedback, refine your approach, and expand your investor outreach. The more you improve and refine your pitch as you go, the more successful you’ll be in scoring meetings.
Short of walking you into your pitch meeting and giving the pitch for you (that costs extra!) we want to arm you with as much insight into both the process and best practices so that you feel confident in your approach.
Some of these exercises will feel a bit obvious but a few will likely strike you as “Wow that sounds obvious now that you put it that way!” None of this is rocket science – but most Founders make the same mistakes that we’re trying to help you avoid, so please take some time to digest all of this so you can be as buttoned up as possible when you make that big ask.
Preparing to pitch investors is about having all your pitch material at the ready for each phase of the pitch process. It’s important to note that the pitch process takes months, not weeks (in most cases), and can easily consume 3-6 months if things go well with your outreach. It helps to understand the steps of the process so that you can begin to triangulate where you are in the pitch process and potentially how much further you have to go with your raise.
A quick version of how the process works is this:
A quick email outreach that describes the company, hopefully, introduced via a friendly connection and not cold emails.
The investors want to know you’re credible, so they look at your Linkedin profile and personal social media.
The investors want to get a taste of what you’re doing, so they look for your Web site in hopes they can see the product (or at least some in-market collateral) firsthand.
The investors like what they hear but they want more information so they can dig into some areas of concern by looking at other data points.
The big pitch! This is your opportunity to build personal rapport with the investor and show them you’re well prepared to take on capital.
If the investors are ready to get serious about your deal, they will initiate diligence where they request detailed documents supporting your business case.
This is where the investors make an actual offer to invest including the key terms like the valuation and offer amount which determine their % stake.
This is the legal process of turning their offer into a binding legal agreement whereby they are issued stock.
As we’ll discuss later, these steps happen in a fairly linear fashion however you’ll likely repeat many of the steps over and over until you get an opportunity to move forward to the next important step.
Once you've got your investor list ready, the first step is to reach out to them with a very well-crafted email. Your introduction should include both your Elevator Pitch and all of the elements of the perfect Email Pitch Template. Best practice: Use a CRM to track conversations.
The goal of the email introduction isn't to convince the ideal investor to write a check — it's to get them interested enough to want to learn more about you. You're hoping they will do a little homework on your company, and if they like what they see, they will ask you for more information on the company.
Later on in this section, we’ll talk about how to find the best inroads with different investors to develop a warm introduction.
How do I know this person? (personal connection to Founder)
Do I understand the problem the startup is solving?
Am I familiar with the industry?
Do I care about the solution?
Is this a big enough market for me to get a return on my investment?
Does this sound credible enough to warrant more of my time?
Depending on how you’re introduced (through a warm introduction or a cold email) an angel investor is going to want to know a bit about you personally. Ultimately, they want to know “is this person credible?” You can have an amazing idea but if you aren’t a credible Founder, their confidence that you can pull off the idea is fairly low.
Investors also realize there are lots of great ideas, but finding credible Founders is a harder search. Therefore you want to make sure what they do find about you is your best foot forward.
The most likely source of information is going to be your Linkedin profile since most people maintain this as a primary source of their business resume. Within the profile make sure you tweak your resume to highlight any experience you have that relates to this startup.
Beyond Linkedin, also consider what else shows up in a Google search for your name. Now might be a good time to make your Spring Break photos from college a bit more private. Also, if you have specific references that you’d like people to find, like a blog or Twitter account, do yourself a favor and point directly to those links in your outbound communications.
Last, if you have press that you’ve received that in any way either relates to this business or perhaps a meaningful past success with other startups, don’t be afraid to include that as well. That will help establish some 3rd party validation that you’ve done something meaningful.
Investors are asking:
Are the Founders credible? Is this the right team for this startup?
What have the Founders done that makes them capable of solving this problem
What does their social media and personal Web presence say about them?
Can I cross-reference their credibility with a 3rd party source? (press)
Whether or not you do business on the Web, having a Web presence today is like having a business card in the 80’s – it’s expected if you’re going to look professional. Your Web presence can be a single-page website, a blog, or even your social media account. It doesn’t have to be extensive, but it should at least look professional.
The investors are going to look to see if your product concept is well-communicated if there is any demo they can see (anything from a clickable demo to some nice pictures or a video), and what if anything they can learn about the company’s traction (press, testimonials, customers). Don’t overlook the importance of having some sort of online presence to give investors a good sense that you “exist” outside of the pitch deck or email you shipped out to them.
As always, make sure there are multiple references to your web presence provided in all your communications and collateral. That includes your email signature, your pitch deck first/last slide, and the footer of your business plan or executive summary. By all means over-communicate this.
Investors are asking:
On first impression do I feel like this is the type of product I want to be associated with?
Does the message they are conveying in their marketing materials resonate with me as if I were a customer in the target market?
Are people already buying? Do they like the product? (customer validation)
Are other people talking about this company on social media? What are they saying?
Does this fit my overall investment theses?
If the investors like what they see, they will request a slightly more detailed synopsis of your business. Investors don't parse through 50-page business plans to evaluate an idea. They look for a very tight, well-thought-out overview of each key area of the business in as few words as possible.
Depending on the potential investor's preference, they are either going to ask for an Executive Summary or a Pitch Deck. Both are the same information organized in a slightly different manner. They include references to your Team, Problem, Solution, Product, Market Size, Competition, Marketing Strategy, and Financing details, among other things.
In either case, you'll want to make sure you're responding with that document the moment you're asked for it as investors lose interest by the minute. Waiting until after you get investor interest to write and review these documents is a really bad idea.
Remember that investors asking for more information is considered a “buying signal.” Don’t just respond with the document. Take it a step further with some qualifying questions such as “Is there some particular part of the business that I can shed more light on?” That way instead of sending an entire document of a hundred potential answers you can expound on exactly what the investor really wants to know.
Investor is asking:
Does this company even have more quality information? (you’d be surprised how many don’t have more than a basic pitch)
There are some key questions I’ve got about this business that I’m hoping some additional documentation can cover.
How is this startup positioned around key areas such as team quality, customer acquisition strategy, or competitive space?
What are the financial projections of this company and what assumptions are they using?
Getting an investor meeting is a big deal. It doesn’t mean you’re a shoo-in for funding, but it means that compared to the dozens (hundreds?) of other startup pitches this investor has received, they chose to invest their most valuable asset – their time – to learn more about yours.
The investor can request either a call, video chat, or in-person meeting depending on their schedule and logistics. These meetings will typically run from as little as 30 minutes to just over an hour, but rarely much longer than that for a first meeting.
Remember this meeting is selling two things – the value of your startup idea and the credibility of you (and your team) as Founders. This isn’t just about pouring through your pitch deck – you are auditioning and interviewing yourself in a very real way. Make sure you take note of that and try to establish some personal rapport with the investor so that they can see themselves working with you for the next 5-10 years.
On the startup side, you’re going to use the 10-12 slides of your pitch deck to start a conversation. The goal isn’t to make it to the final slide (so important!). The goal is to find out which slide the investor cares the most about and center the discussion around that point.
They may already agree with your problem and solution but have serious reservations about whether you can scale customer acquisition. If that’s the case, that’s what you’re there to talk about.
Keep asking “What’s most important to you?” And make sure you’re steering the conversation about their needs, not what happens to be in your pitch deck. When you’re wrapping up, ask them “Where can we provide some more detail?”
If they ask for more follow-up detail, that’s a good sign. If they don’t, that’s not necessarily a bad thing, it just means they aren’t immediately ready to move forward in most cases.
In some cases, if the investor has partners they may request that you meet with the partners as well. Especially in the case of venture capital firms, doing the “partner meeting” where you present to the whole partnership (who usually have to unanimously agree on a deal) is typical. So expect a few follow-up meetings if things are going well.
Investor is asking:
Do I like and trust this person? (this is very important)
Can I envision myself working with this team for the next 5-10 years?
How are they answering my key questions? Do I believe their answers?
Have they thought through everything? Am I punching way too many holes in this plan?
Is this startup interesting enough for me to start investing serious time in?
If the investor loves your pitch, they are going to ask for more detailed documents. This is a good thing. It means they are willing to start doing some diligence to see if all of those crazy claims you made in your presentation have merit!
The diligence items may vary, but in general, they will consist of a full Business Plan that details things like your competitive position, your marketing strategy, and your product functionality. The request will certainly include your Financials, which will detail your use of proceeds as well as how you will make money in the future.
Lastly, you will likely be asked for your Cap Table, which is a summary of who owns what stock in the company. You usually won't be asked for that unless there is a slightly more complicated ownership structure that might include lots of people.
Investor is asking:
How can I be as certain as possible this is a credible opportunity?
Did I find any gaping holes when I dug in deeper on the company or the market?
Do these financial projections hold up to some serious scrutiny?
Are there any legal issues I should be aware of?
Is this the type of company I’m ready to write a check with?
Requirements: Term Sheet
If your deal stands up to the scrutiny of diligence and a series of meetings, the next step is to come to terms on the financing itself. Individual angel investors may simply have a conversation with you about valuation, investment size, and related terms.
More sophisticated investors (firms) will usually send you their offer in the form a Term Sheet which is a short 2-3 page document that lays out all the major important terms of the deal. It’s much easier for two parties to first negotiate over a term sheet than to try to dig into a large legal document.
The challenge with the Term Sheet stage is that often what two parties think a fair deal looks like and what it really looks like once you write every term down aren’t the same.
You may agree that the company has a $4 million valuation but you never discussed the fact that 5% of the company to pay future employee stock options would come out of your stock, not theirs (this is standard, and it’s generally annoying!)
This is where the dance of investor/startup negotiation begins, and it can generally last anywhere from a week to a couple of months. It’s important to note that time is the enemy of all deals, and the longer this process takes, the more likely it is to blow up.
It takes months to start dating but only one day to break up!
Investor is asking:
Is this startup willing to offer me fair terms for my investment?
What can I learn from how they respond to negotiations about who these people are? (it’s like the first time a couple has a fight)
Does the startup actually understand the terms of this deal? (many don’t)
Do I feel good about where we landed on terms?
Have I lost interest since this process began? (it happens)
If you finally do agree on all the critical terms of your deal, the last step will be to move to closing. What’s important here is to not assume the closing is a “done deal.” It’s not. It’s still more time that can transpire before an investor can back out. You want the closing to go as quickly as possible without overlooking any critical legal challenges.
This is where a good lawyer who has handled financings before can be a total game changer. An experienced lawyer will recognize all the terms that are “standard” in your stage of financing and those that are a bit out of bounds.
You will rely heavily on this counsel, especially if you are a first-time Founder raising money, so choose wisely. It may be great that your Uncle Jared is willing to do the work for 50% off, but this isn’t the time to save money. You want a very experienced lawyer who has substantial experience in specifically this type of legal work.
Even after you negotiate the Term Sheet there may be a handful of clauses within the long form of the financing documents that require additional negotiation. Remember that these are designed to be your “divorce papers” and generally center around what to do when things go wrong. As such, they feel egregious in certain areas. Don’t take offense, it’s just the way investors set up deals to protect against a worst-case scenario. They aren’t trying to “take your company later” – they are trying to make sure you don’t take their money and throw it away!
The closing can take as little as a few weeks (unlikely) to as much as a few months (more likely) depending on the complexity and stage of your deal. Generally, small amounts (sub $100k) can close faster than large amounts ($5m Series A round) because larger investors generally require more protection in their larger investments.
Investor is asking:
Will this startup be willing to afford me the protections I want in this deal?
If everything goes totally sideways, what will be my legal recourses with this company?
Is this Founder a total pain in the ass to work with? If so, will it always be this bad?
Are the things they are pushing back on a reflection of some other issue I should be concerned about?
Do I still feel good about this deal?
If you’ve made it past every one of these hurdles and on past the closing – congratulations! You are one of a very small percentage of startup Founders who have made it through the “startup investor gauntlet!”
While the path we laid out here is fairly linear, the path of raising money is not. It’s a series of starts, re-starts, step back 3 paces, and so on. You’ll go for weeks without hearing from a single investor and then get 4 requests for a meeting on the same day.
While the process to you is very linear, every investor is in many stages of discussions with startups all the time. A lot of this is just you finding the right timing with the right investor with the right pitch.
Continue to Part 2 - Investor Introductions: How to Get Them