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How to Approach Investors 101

This article is adapted from the author’s new Babson Case Study, Designing and Delivering the Perfect Pitch.

By Angelo Santinelli

OK, so you’ve spent weeks (or months) in the classroom talking to your students about the hard analytical work they need to do before making a pitch. For instance, you’ve discussed the intricacies of conducting a feasibility analysis on whether the proposed product solves a large problem, whether there’s a growing market, and whether there are barriers to entry.

But, what do you teach your students about the next step of approaching investors? Entrepreneurship students need to know that making this step requires a thoughtful plan and approach as well.

After all, not all investors are the same. They often seek to invest different amounts or to invest only in certain types of technologies. Their outcome expectations vary a lot, too.

Below, I describe how to help entrepreneurship students understand the various approaches to meeting investors, the distinctive types of investors, as well as their peculiar needs.

Entrepreneurial Speed Dating

The process of meeting qualified investors more closely resembles the process that one employs while on a dating site; carefully reviewing each individual’s likes, dislikes, and personal traits before initiating contact. Once again, the propensity to execute often leads to the employment of the less efficient process of sending an executive summary, or teaser document, to a large list of investors and waiting for a response.

As with dating, your chances of a meeting the right person are greatly improved if you get a warm introduction from someone that they know and trust.

Understanding Investor Types

It is important to understand that not all investors are equal. A careful review of an investor’s website should easily reveal information about the individual’s portfolio of investments, investment stage and size, as well as geographic and industry focus. If you are focusing on an angel group, most angel groups also have websites indicating the target industry segments, as well as stage of investment preferred. The same is true for corporate venture capitalists and institutional venture capitalists. It also is important to use existing networks of entrepreneurs to understand more about the personalities, politics, and processes of various investors.

Investors may differentiate themselves based upon stage or size of investment. For instance, most angels and some venture capital funds will focus primarily on seed and early-stage projects. Their investment size may range from several thousand to several million dollars. Other investors may focus primarily on later-stage investments, where the range of investment might be in the millions or tens of millions of dollars, but some of the startup risk might already have been mitigated and therefore the valuations larger. It is important to understand the stage and typical size of investment before approaching an investor.

Geographic and industry segment focus is yet another way that firms may differ. Seed and early-stage investors will usually have a narrow geographic focus, preferring to invest within a short drive of their office. This is done less for convenience and more to address the hands-on nature of seed and early-stage investments where an investor’s network plays a major role in team development. Last, investors may choose to focus somewhat narrowly on specific industry segments, such as software or telecommunications infrastructure. This might be driven by macro forces in the industry or the background and expertise of the investors in a particular firm.

All investors have a reputation and investment process all their own. Speaking with other entrepreneurs who have done business with the investor will reveal important data about the personalities within the firm and the investment process. It is important to understand how investment decisions are made and who influences the decision. It also is important to understand the investment process and where your project is within the process or deal funnel.

Once again, you should do your own due diligence to thoroughly understand the investors you are considering prior to approaching them. This will serve to save the entrepreneur time and the risk of appearing disorganized in their approach to finding the right partner.

Understanding Investor Needs

In addition to the items noted above, it is important to understand how an investor views risk and return. Seed and early-stage investors accept more risk in a project, and will require a higher return for assuming that risk. This translates into a much higher degree of control most often gained through equity ownership and board representation. Though the expectation for returns is much higher, seed and early-stage investors take a long-term view with regard to the timing of those returns. Depending upon the amount of risk that remains in the business, later-stage investors might accept a less-than-controlling share of equity, but usually will seek other mechanisms of control and subsequently expect a smaller return, but one that will occur in the not too distant future. Here again, it pays to understand each investor’s needs and expectations for ownership, control, as well as, the timing and size of returns before scheduling a meeting.

Funding Sources and Amounts

Financing
Round

Definition
Typical
Amounts

Who Typically Plays
Seed Prove a concept/qualify for start-up capital $25,000–
$500,000
Individual Angels
Angel Groups
Start-up Complete product development and initial marketing $500,000–
$3 million
Select Individual Angels
Angel Groups
Early-stage Venture Capitalists
First Initiate full-scale manufacturing and sales $1.5 million–
$5 million
Venture Capitalists
Second Working capital for initial business expansion $3 million–
$10 million
Venture Capitalists
Private Placement Firms
Third Expansion capital to achieve break-even $5 million–
$30 million
Venture Capitalists
Private Placement Firms
Bridge Financing to allow company to go public in
6–12 months
$3 million–
$20 million
Mezzanine Financing Firms
Private Placement Firms
Investment Bankers

Source: VSS Project Angel Investors: a joint HBS/MIT study on Angel Investors; definitions taken from Pratt’s Venture Capital Guide ©1999 MIT Entrepreneurship Center

Prior to meeting with an investor, most require the submission of a pitch deck, executive summary, and financial statements. If you are applying to an angel group, this usually will be to an online website, where members of the angel group will review the documents and rate it.

There is the possibility that your application might be desk rejected at this point, if the reviewers believe that the business is too early for funding, or does not fit the strategic focus of the group. In other cases, an application might be desk rejected because it is not appropriate for equity funding, but rather more appropriate for grant funding, debt financing, or family and friends. When you are accepted to attend a pitch meeting, you will need to think about both the content and the communication aspects of the pitch.

Entrepreneurs often believe that they have a great idea, and want to execute quickly. Usually, though, taking a more measured approach—including a thoughtful approach to investors—will boost your odds of success.

 

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Angelo J. Santinelli

Angelo J. Santinelli is an Adjunct Lecturer in Babson’s Entrepreneurship Division and a Faculty Advisor for the John E. and Alice L. Butler Venture Accelerator Program. Santinelli’s more than 20 years of business experience covers a broad range of disciplines and responsibilities, including business development, strategic planning, M&A, IPO, private equity financing, customer service, all aspects of marketing, and international operations.