Any entrepreneurial venture—no matter its origins, industry, or product-market fit—requires financial capital to get off the ground.
In the online course Entrepreneurship Essentials, Harvard Business School Professor William Sahlman explains that in entrepreneurship, financial capital’s key role is to produce valuable information through hypothesis testing.
“The best tests reveal lots of information at low cost in a short period,” Sahlman says. “If a test suggests that the team is on the right path, the team gets some more money, people, and other resources to run a different or bigger experiment.”
He later adds, “It’s most productive to think of entrepreneurship as an iterative process—a way of managing that involves continually searching for a winning combination of opportunities and resources.”
There are several ways to finance a venture, including:
- Self-funding:Using money from your personal savings or retirement funds
- Crowdfunding:Using a platform like Kickstarter or Indiegogo to collect donations in exchange for eventual access to the product
- Small business loan: Applying for a bank loan you’ll need to pay back with interest
- Venture capitalists or angel investors: Receiving funds from a firm or individual investor in exchange for a share of the company within agreed-upon terms
Venture capital and angel investments are popular ways to finance a business, but they can be difficult to navigate. How do you decide which investors to pursue and make the most of your time with them? Here are several tips to keep in mind as you find and speak with potential investors about funding your entrepreneurial venture.
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To get the most out of the fundraising process, you need to determine what type of investor is right for you and your business. There are two main types of investors: angel investors and venture capitalists.
A venture capital (VC) firm pools the money of individual, institutional, or corporate investors (called limited partners) and strategically invests in companies on their behalf. The people who manage the funds are called general partners or venture capitalists.
Angel investors, also called angels, are individuals who decide to invest in companies on their own rather than as a limited partner at a VC firm. While angels typically invest smaller sums of money than VC firms, they’re known for taking chances on early-stage startups.
No matter which type of investor you pursue, research the firm or individual to gauge whether they seem like a good fit. When it comes down to it, every investor is different. Because you’re going to agree to their terms, communicate with them through your business’s successes and failures, and give them a share of your company, you need to ensure they’re someone you trust and want to work with.
Define Your Entrepreneurial Goal
Before speaking with potential investors, clearly define your entrepreneurial goal. Is it to make a stable income? To get acquired by a larger company? To disrupt an industry and become the “next big thing?" Whatever your goals, define them so you can see each potential investor as someone who can help reach them.
Leverage Your Network
To find potential investors, leverage your professional network. Investors are inundated with pitches and asks from countless entrepreneurs; having an introduction from a mutual connection can make all the difference. Additionally, your mutual connection can vouch for your character and the investors'.
5 Tips for Talking to Potential Investors
1. Craft a Clear, Concise Pitch
When speaking with potential investors, you need to make every second count. Chances are, you’re one of many entrepreneurs approaching them with proposals, so prepare a short pitch that clearly communicates your idea, its value, and why you need funding.
Your pitch’s length depends on the circ*mstances. If you’re pitching to investors in a formal presentation, the length parameters will likely be set for you and fall between three and 15 minutes. If you’re speaking to investors in a more casual setting—like a networking event or a meeting with a mutual connection—it’s wise to prepare two lengths: one minute and three minutes. This way, you can provide a high-level taste of your business idea and, if they’re interested in continuing the conversation, you have more detail to expound on.
Practice reciting your pitch to friends and family, along with people who aren’t familiar with your idea. If they’re confused or need clarification, you can edit your pitch to be as streamlined and impactful as possible before meeting with potential investors.
Related:How to Effectively Pitch a Business Idea
2. Articulate Your Product’s Value
Investors are in the business of identifying ideas that address untapped opportunities. When speaking with them, articulate what opportunity your idea taps into, your audience’s size and makeup, and what differentiates your product from competitors’.
Another way to conceptualize your product’s value is to define what “job” customers “hire” it to do. The jobs to be done theory, coined by HBS Professor Clayton Christensen and explored in the online course Disruptive Strategy, states that customers don’t just buy products; they hire them to do jobs. For example, a customer might hire a protein bar to do the job of keeping them full while traveling or hire a specific pair of running shoes to decrease knee pain on long runs.
Your product may be hired for different jobs by different customers. Defining those jobs can help articulate your product’s value.
Related:Jobs to Be Done: 4 Real-World Examples
3. Tell a Compelling Story
While metrics and statistics are important for proving your product’s value, presenting investors with raw data can leave them disengaged and uninterested. Telling a compelling story backed by data can allow them to connect, relate, and feel personally invested in your product.
One story you have at your disposal is your product’s origin. Perhaps you faced a challenge or noticed a problem in the world that wasn’t being addressed by current market offerings, and you decided to create a solution. Maybe there’s a story of how your offering improved an early customer’s life.
Whatever story you choose to tell, paint the picture of the character, their problem, and how your product was the solution.
4. Explain What Funding Would Provide
It’s important to be upfront about how much funding you’re asking for and what it will enable you to do. Before committing, investors want to know their money will be used to propel your business forward and lead to a return on their investment.
Their funding may enable you to run more hypothesis tests, hire key employees, or pay for bulk materials to manufacture your product on a large scale. Give them as much detail as possible about the positive impact their backing could have on your business’s success.
5. Highlight the Specific Investor’s Appeal
Finally, be specific about why you chose to reach out to this specific investor. Perhaps they support Black, Asian American and Pacific Islander, Latinx, female, or LGBTQ+ founders, or they specialize in a particular industry or startup stage. Maybe you feel a connection to a company they previously invested in or admire their track record for successful investments. Research them before meeting to determine these factors.
Whatever your reasons, articulate why you think they’d be a good fit and why you would benefit specifically from their investment, as opposed to someone else’s.
The Impact of the Right Investor
Finding, wowing, and striking up a deal with the right investor can aid your entrepreneurial journey not only financially but personally.
A good investor can provide support, advice, industry connections, and credibility to a budding entrepreneur. After all, they’re not just taking a chance on your business, but on you, too.
By researching, honing your pitch, communicating your product’s value, and being specific about your intentions and goals, you’re on your way to landing the right investor to help your business take off.
Are you interested in honing your entrepreneurial skills and innovation toolkit? Explore our four-week Entrepreneurship Essentials course and other online entrepreneurship and innovation courses to learn to speak the language of the startup world.
