Movies and other pop culture likely lead people to believe that professional investors are the most likely source of capital for a start-up venture. Urban legends have told us that an angel investor is waiting around the corner with the ability to wave a magic wand that will turn any venture into the next big thing.
If a venture is fortunate enough to have a professional investor involved in their effort, it unfortunately is not as simple as just taking money from this financier. When dealing with angel investors, venture capitalists, or other institutional investors, its important for an entrepreneur to leverage much more than just capital.
Investors should be invested both financially and emotionally. Ideally, you want an investor to be a cheerleader for your venture. Bear in mind, there will likely be multiple rounds of capital needed for a successful venture and the best way to expand into new investment groups is for current investors to spread your message to their network on your behalf.
An ideal investor is one who has committed capital in an initial round of funding, but has become so invested (emotionally and financially), that they are willing to commit more in the future, should that be necessary. Much like employees and strategic partners, you need to make sure that investors are committed for the long-term. This not only means they have the potential to re-invest in subsequent rounds of fundraising, it also means they are willing to wait at least five years for a return on their investment. The last thing any venture needs is an investor that is looking to exit an investment after only a year or two.
While many suitable, vetted financiers may say they are interested in investing, most experienced entrepreneurs will tell you that fewer than 25% of those individuals will actually invest. In fact, the rate may be as few as 10%. When investors do finally commit, it is likely they will only invest 50% (or less) of what they originally committed. Start-up investors are just as conservative as the population at large and they like to hedge their risk as much as possible.
Even if a potential source of capital reviews your firm’s investment information, has follow-up questions, and entertains the notion, there is still a very low chance that they will actually invest. Bear in mind, professional investors review dozens of deals each week and your investment presentation is just another file in their inbox. Obviously, the trick is to find ways to make your investment presentation standout.
Try This: Try to find investors with an interest in your specific industry niche. Whether they are professional investors active in the industry or individuals with an interest in your sector as a hobby, this background will give them a predisposition towards your venture.