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3 Steps to Win Over Investors

It's how you spin it: Incite their greed and dispel their fear.
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Fundraising is of the most exhilarating--and terrifying--parts of running a startup. It’s exciting to go from meeting to meeting, sharing your vision and convincing others of its potential, but it can also be nerve-wracking, tiresome and repetitive. And think about it: If more than 90% of startups fail, you need to be on your game, all the time, to make it clear that yours will be in the 10 percent.

You’ve got to hook your investors. When approaching them, it’s essential to remember that investing is a fine balance between greed and fear. You need to minimize your potential investors’ fear, and instead excite them about the lucrative opportunity that you bring.

Make those meetings count. There’s no single, surefire method for success when raising rounds. It’s not a formula. But I’ve been on both sides of the process and I’ve noticed three steps that can help win your investors over, and keep them from scaring off too easily.

1. Be excited--but clear.
Starting a business is a monumental risk. Ask yourself this: Why are you doing it? The answer probably encompasses your passion for an industry, your belief that you will succeed, and your confidence in your idea. Your first job is to transfer this excitement to your potential investors.

That doesn’t mean that cheerleading is the answer. Your passion must be infused with a sense of clarity: clarity of what the problem is.

Then, be clear: Why is your fix better than other solutions that currently exist? Make sure you present an informed understanding of your space. Make your potential investors understand the space as well--they should understand why your company is a necessary solution. Making that clear for them, and for yourself, is 90 percent of the work.

2. Don’t scare them.
Frankly speaking, you need investors to be greedy--and not scared. Watch out for fear; it can be a very powerful deterrent. It is equally important to minimize investors’ fear as it is to excite them about the possibilities.

Anticipate their questions. What are your venture’s prime risk factors? What are reasons an investor would think that you might fail? Why will you succeed when others have failed in the past? Understand your competition, and why they will not prevent you from being profitable. Emphasize what differentiates you. I always ask entrepreneurs: What is the smallest problem that you’re trying to solve, and why does it matter? This question is the simplest, most meaningful way to get at the core of the business. If you can’t answer that well, and with conviction, then investors are going to have a hard time making that leap of faith.

Many entrepreneurs make the mistake of focusing on the “how.” They prattle on about how they plan to make their vision happen. But potential investors care about what the idea is, and why it’s exciting. That will help you paint the picture you need to spur their greed: they need to be excited about what they stand to gain by investing, and not sidetracked by the fear that they could lose everything.

3. Be realistic about the money.
Pricing isn’t really an issue unless you have flexibility; if you really need the money, you’ll take what you can get. But if you’re past the early stages of frantic fundraising and have multiple investors interested, or flexibility in the amount you are raising, the final part of your discussion should be centered on your business model.

You should have, mapped out, where you will be in one, two, and five years. How much money do you need to get to those points? You need to be able to say how much you believe your venture will be worth at the next stage, and how much capital you need to get there. What can a potential investor expect in terms of return? Your investors will want to know why they’re paying for something, and why they’re paying a specific amount.

Don’t spend too much time looking for examples of what others are getting. Figure out what you really need and ask for it. If you can do it on $1 million, then ask for $1 million. If you need more, ask for more. Try to make sure you get what you really need, but don’t ask for a lot more or you’ll be setting unrealistic expectations.

Don’t pull a number out of thin air. Your investor needs to assess how much he or she is willing to spend, so the more detail you can provide, the better. If you want funding to get you through year one of of a five-year plan, be prepared to give specific numbers: the people you want to hire, the time it will take. Show that you’ve done your homework. Have the math to back it up and a detailed spreadsheet of your needs.

Getting your investors excited about your idea is essential; proving to them that you have the answers to their questions, and a clear-cut idea of exactly where you are going, is how you seal the deal. If you can translate your excitement and confidence, you’ll not only have investors who want to sign checks, but who believe in what you’re doing.

Last updated: Jan 31, 2013

MEHDI MAGHSOODNIA | Columnist | CEO, Rafter

Mehdi Maghsoodnia is the CEO of Rafter, which provides a cloud-based platform designed to help colleges make educational content more affordable and effective. He was previously SVP at CafePress and Intellisync.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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