Do’s and Don’ts: How Do You Approach Investors?
Behind every approach to an investor stands an entrepreneur full of hope and faith.
As an investor, I receive dozens of emails every month. There are always some that make my heart ache as I read them. Sometimes, it is an entrepreneur who simultaneously writes to all the investors they have ever heard of, and sends them all the same email (usually something like “I have an amazing idea that will make you rich”). Sometimes it will be a poorly written message full of misspellings. I find myself thinking about all the hope and faith behind the email, but I also realize that the die has been cast. The chances of such a message to receive a favorable response by a serious investor are very slim.
What should not be done when approaching investors for the first time?
1. Never reach out to a group of investors as a group. The investment process is an intimate process between an entrepreneur and an investor. Investment deals (like any other multi-million dollar deal) do not begin via a spam message involving multiple people. Moreover, when you approach investors as a group, you cannot create a real dialogue with any of them. The chance that they respond is low, as is the chance of you learning anything from the interaction with them.
2. Do not use intermediaries or agents. If you have a friend who can introduce you to investors, great. If not, contact them yourself. Do not pay for an introduction and never give up a piece of your company for one. You must understand that venture capital funds, and other professional investors, invest significant capital in marketing and brand- building efforts so that entrepreneurs are familiar with them and approach them. Good funds value their ability to connect directly with companies and communicate effectively with entrepreneurs. Use of intermediaries may only be relevant in special cases, such as raising funds in remote territories and/or when aiming to raise funds from non-professional investors.
3. Do not have anyone else reach out on your behalf. Some entrepreneurs think that it is better for their assistant or one of their employees to approach the investor. I have never understood that. In my opinion, the CEO or the entrepreneur is the only one who needs to approach investors. Raising capital is a strategic process in every company – especially in a young company. It is a process that depends largely on the personal chemistry between the entrepreneur and the investor, and delegating this to another person sends an incorrect message to the investor before the process has even begun.
4. Do not be argumentative, do not be patronizing, and do not hide information. If the investor has questions – answer directly and concisely. Respect the process of the person you are interacting with. If the investor has a question, it must be important to them. Sometimes I come across entrepreneurs who try to avoid providing answers (on various pretexts), and that obviously does not help them in any way.
5. On the subject of confidentiality: A response along the lines of “it’s a secret, I cannot answer,” is very problematic. An entrepreneur must be able to describe his company without being concerned. I do not mean, of course, a detailed algorithmic (“how?”), but rather a description of the problem, the product, the customers, (“what?”).
So, what should you do?
1. If you can, talk to someone who has already done it. Get advice from someone knowledgeable. The more prepared you are as you enter the process, the more likely you are to succeed.
2. If you have decided to go for it, contact only a small group of relevant investors that are relevant to you (How do you know who is relevant? Simply choose a few companies that are in a field similar to yours, check where they got their funding from, and right there you have the perfect list of potential investors). Approaching a small number of investors will allow you to better control the process. You may find out after several conversations that you want to make changes to the company’s presentation. If you reach out to a lot of investors at once, it will be harder for you to do so. It is important to do your homework before each meeting: Learn a bit about the person who will be sitting across the table – what have they invested in? What are their areas of expertise? This can help you greatly in the conversation.
3. The fundraising process will require valuable time – be prepared for it. Interested investors will ask additional questions and ask to see materials. If you answer quickly and comprehensively, it will encourage them to move forward and even speed up the process. If you delay the process, you will be sending a very problematic message to the potential investor. Prepare materials in advance. The materials should be very professional and concise (no detailed business plans are needed). Professional investors see hundreds of business plans a year, they do not have the time to carefully read each one. They need to understand within a few minutes if they want to meet you or not, that’s it.
4. Most importantly, be yourself! Don’t put on an act. If you made a mistake, it’s okay to admit it. It’s kind of like a marriage relationship – if you try to “bluff,” you will not get away with it for long, and even if you do, what are the chances of this relationship succeeding? Take advantage of your time with the investor to also learn about them. What kind of people are they? Do you really want to work with them?
5. Received a negative answer? Did you not get a response at all? Ask the investor why they decided not to proceed with another meeting. You will not always get an answer, but from experience, if you do, you will learn a lot. This information will help you understand more about your business and, in particular, understand how investors perceive your business and what you can do to be more successful in the future.
I spent most of my life as an entrepreneur thinking I knew investors well, but the truth is that after a few years as an investor, I realize that wasn’t the case. I did not understand how busy and burdened they were with their investments. I did not understand the importance of personal chemistry. Most importantly, I did not realize that, sitting in front of me, was a person who really wants to invest (just as I wanted them to invest in my company). As investors, we see hundreds of plans a year, meet with dozens of people, and all this to find the very few companies worth setting out on a wild journey with. Help us understand that you are the right partner for that journey.
On a personal note: In recent weeks, there has been a lively public debate about women entrepreneur harassment by investors. This is a nauseating phenomenon. All the investors I know are passionately angered by these occurrences. If there is an entrepreneur reading this who has been treated unfairly, I would like to encourage you be courageous and make a complaint. In any case, as entrepreneurs, you cannot afford to be deterred or afraid to approach investors. Now, more than ever, the industry is desperate for great entrepreneurship by women.