Your business plan is complete. You know how much funding you need. You have detailed exactly what the money will be used for. What is the next step?
It’s time to approach investors with your funding request. And for most entrepreneurs, this step can be terrifying. And for good reason!
The reason why many businesses fail in winning funding is that they make a deadly mistake in their first steps in approaching investors with their funding request.
Are you making this same mistake when constructing your funding request to an investor?
The Biggest Mistake Entrepreneurs Make
Yes, this is a daunting time for your business, but you don’t want to make the same blunder that many entrepreneurs have.
The biggest mistake that many businesses make is not understanding the various investor types and the types of businesses and programs that they fund.
Many are approaching investors that are not appropriate to their type of business.
Before contacting an equity investor, identify which type you should pursue: Angel investors , venture capital firms that invest in ideas or early-stage businesses, or private equity firms or buyout groups that invest in established companies.
- If you are in the starting phases of your business then you should be focusing on Angel Investors who specialize in your business niche.
- Are you seeking equity capital for a Big Idea that needs funding to pursue the realization of your idea? If so, identify venture capitalist firms.
- Or are you seeking equity capital for an established, operating business? If so, identify private equity firms or groups that do buy-outs.
If you are not an established, operating company, but you do have a Big Idea that needs equity capital to pursue the growth of your idea:
- How much capital do you need to prove your idea works or complete a prototype?
- How much ownership are you willing to sell?
If you have an established, operating business, some initial questions to consider are the following:
- Are you seeking an equity investor to invest capital directly in your business for growth?
- Do you want to sell a portion of your company to diversify your personal portfolio because nearly all of your personal wealth is tied up in the illiquid stock of your company?
- If so, do you want to sell a minority position in your company or are you interested in a new partner who wants to own a majority stake in your business?
For more information on investors see Do You Understand Various Investor Types?
Equity is Different than Debt
Equity investors (private equity firms, Angels, and VCs) have significant opportunity to invest in a large number of businesses, but they generally invest in one percent or less of the opportunities they evaluate.
Differentiate yourself from the multitude of businesses that are asking for their support.
First and foremost, determine which investors focus on businesses such as yours. If your business meets the investment criteria set by investors, they may be interested to learn about your business.
What Are the Steps to Successfully Win Funding from Investors?
It is best to have made personal contact with investors about your business before sending your written proposal.
Your proposal should describe:
- Your business or the Big Idea that you intend to pursue
- The significant market opportunity that you are going after including quantitative detail about the market size and your potential market share
- Your management team with experience and skills to execute the plan
- Historical and projected financials.
In addition, investors like to know that you have “skin in the game,” so emphasize what you are personally investing in the business.
Assure investors that their investment is well worth the risk and you are committed to the success of the business.
Cover Letter for an Investor
You should always include a cover letter on your letterhead, which lists:
Date delivered to the investor
Your business contact information
- Name of primary contact
- Phone number(s)
- Email address
- Physical address (include mailing address, if different)
Business description or detail of your Big Idea and the business model you will pursue
Amount of the funding request
Uses of the money requested
Benefits to the Investor
Executive Summary for an Investor
It is imperative that the executive summary captures the investors’ attention and motivates them to reach out to you because they want to learn more.
This section should be brief and summarize:
- Your Big Idea
- The business model
- How the management team will successfully execute the plan
Clearly state how much funding you need.
- Describe how the funds will be used
- Highlight how the funds will generate revenues
Investors are interested in helping to build new companies, as well as creating wealth. Detail how your venture will both create an exciting, high growth company and provide a large return on their investment.
The executive summary should include the:
- Name of the business and contact information
- Brief description of the business, including the products and services offered
- Mission statement
- Company history
- Management team experience and relevant skills
- Number of employees
- Amount of request
- Use of funds
- Business model
- Current investors and lenders
- Historical and projected financials
For start-up businesses, you may not have much of this information available because you do not have a business history. In that case:
- Focus more on the experience and track record of the management team.
- Provide highlights of the research on which you based your forecasts, and reasons for starting the business.
- Clearly define the need you have discovered and how your solution solves the problem.
Your funding request is one of the most important pieces of your proposal. If you do not excite the investor at the beginning of this process, your request will be ignored.
As was mentioned previously, investors will fund only about one percent of the proposals they receive. It is highly competitive, and your approach has to rise well above the competition. Make sure that your presentation and materials are top notch.
Your main goal is to show investors that they will make lots of money by investing in you and your business. With that you have a great potential to win funding.
Diane Weklar, the Authority on Accelerating Business Growth, is the CEO of the Weklar Business Institute. She is the author of the award winning book, Mastering the Money Maze: 10 Secrets to Winning Business Financing,which is also an Amazon #1 Best Seller. This book provides practical insight to build a successful business and the practical steps to raise capital to help your firm grow. She can be reached at Diane@Weklar.com.