To approach an investor you need four things:
- First, you need to prepare a presentation about your company that would interest an investor.
- Second, you need a compelling financial model and/or business plan (usually both, and creating them is a great exercise)
- Third, you need to find one or more investors to approach.
- And finally, you need someone to introduce you to the investor.
The fourth step might not be strictly true in the case of accelerators and smaller angels, but when approaching a prominent angel, a super-angel, an angel group or a VC firm, the person who does the introduction can be key.
This is why the three-step process is so common and important for budding entrepreneurs who need investors:
- Accelerator
- Angel
- VC
You get into an accelerator relatively easily: by applying and interviewing. The accelerator then introduces you to angel investors. The angel investors introduce you to VCs. This path is straightforward.
Where to find investors?
Where do you find the investors if you want to skip or augment the accelerator part? If you live in an area like Silicon Valley, New York or Boston, there are hundreds of options. In most other cities there are likely to be several VC firms and angel groups. Your job is to learn about them. Find out the kind of companies they invest in and the stage of company they invest in, discern the place where they are in the cycle (is the fund just starting to invest, in the middle, near the end?), learn about the people involved, meet some of the people involved, etc. For example, an angel group is almost always made up of people in the community. They are approachable and in some cases are happy to answer questions informally, say at lunch.
You can also attend entrepreneurial events in your area and meet people there. If you dig a little, you may be surprised to discover how many entrepreneurial events, classes, meetings, etc. are happening in your area. The people you meet can help you learn the lay of the land, introduce you to the appropriate investors, and so on.
Another place to meet people is co-working spaces in your area.
One thing you are looking for is a person who can provide an introduction. With an angel group, it would usually be one of the members or a close friend/colleague of one of the members. You need to meet a member and talk to him/her about your idea. Network to find a member who is interested in or has experience with your kind of business. You need to be able to convince the person that your idea is something that the angel fund should invest in. In other words, the member needs to believe in your idea. Then the member can introduce you in to the angel group.
Many people might read the previous paragraph and ask, “how do I do that?” In my experience, people in the entrepreneurial community tend to be helpful, and they tend to be networkers. That is, they like meeting people and, within limits, are willing to help you. If a smart, motivated, respectful person who is a budding entrepreneur approaches me and says, “could you help me with _____?”, the answer is probably going to be , “sure, what do you need?” rather than “buzz off”. So if you would like to meet someone in an angel group, you can either do some research, find out who the members are and approach one of them (say at a networking event), or you can approach the leader of the group through an introduction. Tell the person what you are trying to accomplish and ask if there is a member with expertise in your area who might be willing to talk to you.
Alternatively, find an entrepreneurial organization in your area and do the same kind of thing. Where I live the local organization is the CED (cednc.org). They have classes, mentoring programs, meetings, events, etc. and they would be more than happy to help point you in the right direction.
Approaching VCs
How do you get a referral to a VC group? If you are asking for this, you likely do not know how the investing world works. You simply cannot go in cold to a VC firm except in very rare cases (e.g. you have massive traction, and in this case the VC firm may call you). Almost every approach to a VC firm comes with the help of angel investors, or through a well-connected mentor. But if you want to try the road less traveled, consider this. If you were to ask a VC partner what kind of person would be good to do an introduction, the answer would probably be something like, “Find a person with a great reputation in the business community or entrepreneurial community, who has led a successful company or taken a company through funding to a successful exit. Ask that person to help you, mentor you, advise you, take you under his/her wing, be on your board, and so on. In other words, convince a person with a great reputation that you have a good idea and enlist his/her help. Have that person introduce you to a VC firm.”
Three things I can tell you that do not work:
- First, if you simply send a presentation to an angel group of VC firm without being recommended in by someone credible, your chances of success are basically zero. The lack of an introduction shows that you don’t understand the process or that you may lack initiative and the connections in the entrepreneurial community.
- Second, if you send your presentation to a group that does not invest in your type of company or your stage of company, it is a complete waste of time. Of course that will not happen when you are recommended in.
- Third, if you do not have some kind of proven traction and an indication from the real world that there is a market (e.g. a growing audience for a web site, successful sales to customers, etc.), then it is going to be difficult to convince people that your idea has merit unless you have assembled a really good management team with excellent credibility.
Again, this is the reason for the accelerator/angel/VC three-stage process. Accelerators are relatively easy for a budding entrepreneur or startup to approach. The accelerator provides introductions to angels, and angels provide introductions to VCs. Look at a site like Crunchbase and look at all of the companies that started through Y Combinator and then raised more money from there:
Or look for articles like this:
Y Combinator is a powerful accelerator. It has the connections to make introductions.