One of the biggest myths I have found in the entrepreneur community is that every startup needs one or more outside investors for credibility and success, and perhaps is even entitled to at least one. They don’t realize that according to statistics from Startups.co, almost 60 percent are funded with personal savings and credit, and another 25 percent get their money from friends and family.
That leaves only about five percent that actually get their funding from investors, through crowdfunding, banks, angels, and venture capitalists. Of course, if you want to be in that number, or you want that number to go up, you have to know how to locate potential investors who fit your profile, requirements, and expectations.
I saw a good summary of the most effective ways to source prospective investors in a new book, “The Art of Startup Fundraising,” by Alejandro Cremades, who has been there and done that, both as an entrepreneur and an investor. The first step is to set your criteria, including a match for your sector type and stage, and then proactively seek out and contact the best candidates.
- Review profiles on professional social media sites. Searching LinkedIn, for example, is a must for contemporary entrepreneurs. It clearly identifies potential investors who meet your profile, and provides contact information. But don’t wait for them to contact you. Draw up a list of the best prospects, and put together your best story for follow-up.
- Identify customer executives who need your solution. Many savvy entrepreneurs are able to convince high-potential customers that investing early in a high-value solution—perhaps through an advance on royalties—is in their best interest. Customers benefit from early solution access, priority input on requirements, and personalized customer service.
- Reach out to your biggest fans for investor leads. Strong believers in your solution can be your best sales force to find investors, and some of them may be open to investing as well. Any one of them might find an interested rich uncle, or give you a warm introduction to that professional investor that you have been trying to attract.
- Ask your business advisors for warm introductions. There is a good chance that business advisors and mentors also have access to investment capital, or know someone who does. In my experience, an introduction to an investor from a mutual friend or business associate will double or triple your odds of closing a deal.
- Talk to thought leaders at relevant industry events. Getting to know leaders at these events will get you visibility and credibility, as well as valuable feedback on your strategy and solution. Industry leaders are a prime source of leads to companies and individuals that may invest. In addition, it’s always better to be friends before you are competitors.
- Review current crowdsourcing sites for a good fit. By using a service such as Onevest, you can also place your startup in the right shop window and let investors come to you. Crowdsourcing is rapidly becoming the key source for finding investors outside of the mainstream. It works best for solutions that have social value and mass appeal.
While exploring all these alternatives, don’t forget that the right investor in a majority of cases may be you, through bootstrapping and personal credit. The advantages are many, such as avoiding all the costs, pain, and distractions of finding and managing external investors, allowing you to retain full control and all your hard-earned equity for yourself.
The right investor also changes as you move through the different startup stages. Friends and family are key at the idea and early development stages, when you have minimal business valuation. Angel investors typically provide early-stage rollout funding, while venture capital firms won’t be interested until you have real traction and revenue during scaling.
Looking in the right place for the wrong investor won’t help you. But operating in stealth mode, or waiting for that perfect investor to find you, or feeling entitled, is even less effective. The most successful entrepreneurs know where to look and when to look for funding, and the rules are always changing. Maybe it’s time to rethink your startup funding strategy.
Reprinted by permission.
Image Credit: CC by Marta Sanchez