Many business leaders raise capital the wrong way. I am sorry to say that I know this from personal experience as a LinkedIn member. Over the last several months, I have received perhaps a dozen requests for capital or introductions to capital providers from founders who I have no doubt are in desperate need for money.
While hardly a comprehensive survey of capital raising approaches, the mistakes I saw in these pitches for money strike me as common and avoidable. Before getting into these mistakes and my recommended fixes, business leaders ought to recognize one basic truth--you should match the source of capital with the stage in your company's growth.
As I described in my book, Scaling Your Startup, if you are still trying to win your first customers, you should rely on sweat equity or funds from friends and family. Only after your first customers are enthusiastic about your product should you seek capital from others, such as angel investors.
Based on the requests I received on LinkedIn over the last several months, it is clear that these entrepreneurs are not following that prescription. As a result, they are wasting time that, if better spent, could more quickly enable them to get the capital they need from investors who can add value to their business.
1. Don't spam all potential investors with the same pitch.
To raise capital, a business leader needs a rocket pitch and a list of potential investors.
The rocket pitch should start with the customer pain the company is trying to relieve, how its product or service will relieve that pain better than the competition, the size of the opportunity, and the skills on the leadership team that will enable the company to win customers.
The list of potential investors should be people who are the best fit for that company at its stage of growth. If you have yet to win customers, put friends and family on the list of potential investors--not angel investors.
Many of the pitches I received through LinkedIn were missing many of the key elements of a rocket pitch--most notably, any evidence of winning customers or details of why the company's product was solving real customer pain more effectively than competing products, based on, say, 50 interviews with potential customers.
My advice: Answer these questions clearly in your rocket pitch, target the right kind of investor for your company's stage of scaling, and tailor your pitch to what you learn about each investor.
2. Don't Initiate contact with people who lack knowledge of your industry.
All of the pitches I received on LinkedIn made this mistake. My conversations with hundreds of entrepreneurs reveal that the most successful ones attract investors who bring value-added--in the form of product knowledge, customer and partner contacts, help with hiring talent, and strategy--along with the capital.
Founders should research potential investors before sending them their pitch to make sure they offer such added value. While I do not know how I ended up being spammed by these companies, I do know that not one of the pitches I received matched my industry experience or skills.
In addition to researching each person on your list of potential investors, here's another piece of advice that should be made easier by LinkedIn: Don't contact potential investors directly. Instead, get an introduction to them from someone who knows you both well. Such "warm leads" get better responses.
3. Don't equate your urgent need with investors' eagerness to serve you.
The pitches I received also shared a common tone, which I interpret as, "My need for capital is far more important than you. Drop what you are doing right now, listen to my pitch, write me a check, and introduce me to all the investors you know."
I realize that trying to keep a company going can be exceptionally stressful, especially during the pandemic. The attitude I take away from these pitches is not serving these business leaders well--it makes me think they are in over their heads.
My advice is to make it clear what you are offering potential investors in terms that matter to them. For example, estimate the potential return you can provide on their investment and provide references to other investors you've rewarded in the past.
Avoid these common mistakes to raise capital from the right investors more quickly.