There are lots of reasons a business might turn to outside investors for capital. That comes up most often with startups, but occasionally even with more established small business.
Investors might be friends and family, angel investors, or venture capitalists. Startups tend to go with investors when they can, because it’s hard for them to get business loans. And established small businesses will occasionally look for investors, even though that means sharing ownership, instead of standard business credit.
Are you still with me? Good. Here are my 10 tips—oh, and by the way, I did raise venture capital for Palo Alto Software, makers of Bplans, at one point. I’ve been a consultant to venture capital for 35 years, and I’ve been an angel investor for 10 years.
1. Don’t say venture capital when you mean angel investment, or friends and family funding
Many people use the wrong words to describe the type of funding they’re seeking.
Venture capital is a subset of outside investment, and the hardest to get. If you have to ask whether your startup is a venture capital candidate, then it probably isn’t. Angel investment is not venture capital. Funding from friends and family is not venture capital.
Furthermore, it’s important to understand the differences. Start with this article on the difference between the two—and from here on, I’m going to be talking mostly about angel investors, with a touch of friends and family funding. Because, as you’ll see in that article, venture capital is rarified air—quite specialized.
2. Don’t do anything in bulk
When seeking funding, avoid email templates like the plague. Serious investors don’t read executive summaries, or watch a pitch—much less read a business plan—when it looks like it’s being sent in bulk to multiple investors.
That idea dates back to the 1980s when people imagined that investors were looking at business plans coming in unsolicited. Actually, they weren’t, but sometimes they pretended they were. Not anymore.
3. Do your research first
For getting funding from friends and family—which I’ve never done—the best tip I ever heard was not to ask your people directly whether they’d invest or not. Instead, describe the business and ask them who they know who might be interested. That’s less awkward by good measure if your people aren’t interested. They can promise to think about who might be interested, without saying directly that they aren’t. And if they are interested, then that’s an invitation to speak up about it.
For angel investors, always identify your targets carefully before moving forward. Identify a select few angel investors or angel groups that invest the amount you need, in your industry, at your stage of development, in your region.
Angel investors and groups each have their unique interests, identities, and personalities. They have preferences about where they invest, at what stage, and what amounts. Most of them have websites, and most of the websites announce their preferences. They don’t want to deal with people who aren’t in their category and don’t know it. They expect you to know.
The Angel Capital Association lists investors and investor groups, and has statistics, advice, and general information.
You can also search the web for local leads (search “angel investors [your location]” and industry-specific leads (search “angel investor [your business type]” ). Lastly, you can register at Gust, which is free to startups and small businesses, to see profiles of angel investors and listings of angel groups.
4. Forget the businesses that prey on hopeful entrepreneurs by selling databases and leads and such
Those contacts are already rubbed raw by unsolicited emails and phone calls. It doesn’t work that way; it has to be one at a time.
Furthermore, those businesses that take your money with the pretense that angels (or even less likely, VCs) will browse your summary and find you are cheating you. The deals chase the money; the money doesn’t chase the deals.
5. Approach a select few target angels or groups only one at a time, carefully
Be patient. Look first for introductions by checking with people you know who might know them, alumni relationships, business associations, their public speaking dates, and any contacts in the companies in which they’ve already invested.
Don’t be afraid to submit to groups using their website form or call their switchboards, but keep that as a last resort. Your chances are way better if you fit their normal profile and you’ve been able to meet one of the partners, or get an introduction from somebody they know.
6. Have an extremely good tag line and instant summary
Start with the elevator pitch and get the key points down, but the theoretical 60 seconds of the classic elevator pitch is too much. You need to be able to describe your business in a sentence or two and that sentence has to be intriguing.
People have had success with “the [some well-known business] of [some new business area].” For example, Alibaba was called “The Amazon.com of China.” I ran into a company calling itself “the Netflix of kids’ toys,” and with that, the idea was instantly clear.
But don’t count on 60 seconds—be able to do it in three sentences.
7. Have an extremely good quick video or a one-page pitch
Put together an excellent quick video or one page pitch, and send that as the follow-on email when you talk with an angel or get an introduction.
Expect the real information exchange to happen in email. The expected follow up to that quick three sentences is a summary, in email. These days, a great video works better than an email summary.
Keep it secure, not public, and a simple password system like Vimeo or one of its competitors is best. The YouTube email-based permissions are risky because everybody has too many email addresses these days, and confusion is likely. Make it seamless. And I like the LivePlan pitch too, but I also have to disclose that I’m biased—I have an interest in LivePlan.
8. If your summary video—or summary memo—works, then the next step is a pitch
In practice, what happens is there is a contact, you send the follow-up video or summary, and then you wait, anxiously, to be invited to pitch. The pitch is a slide deck, yes, but that’s not what matters; it’s the angels’ chance to meet you, check you out, see your team, and hear your story.
There’s a lot about the pitches on this website. Check this out. Still, don’t think success or failure depends on the pitch. It doesn’t. It depends on the story, the credibility, and the angels’ assessment of your future prospects. My personal favorite is my list of 10 things I hated about pitches I’ve been through.
9. Have a business plan ready before you finish the summary or the pitch
The business plan is the screenplay; the pitch is the movie. Don’t do the plan too big or too formal because it’s not going to last and should never be older than two to four weeks.
Don’t swallow the myth about investors not reading your plan. The truth at the core of that myth is that investors will reject your business without reading your plan—but they won’t invest in it without reading the plan. No business gets money without going through rigorous study and examination first (they call that “due diligence”), and the plan is the active document for the due diligence.
Although, for the record, there are some exceptions. When a well-known successful entrepreneur, the people we read about in the headlines, takes a new business to angels they already know, then those people will often get the investment without the same due diligence.
Angels do compete for those deals. And unfortunately, those people—the stars—will then tell the rest of us that investors don’t read plans. If you need a template to help you get started, Bplans offers a free, downloadable business plan template.
10. Expect the process to take way longer than you think it will
Due diligence alone will be several months of unending requests for more documentation. When VCs say yes they really mean maybe, and when they say maybe they really mean no.
11. Two critical bonus tips
First, never ever spend investment money before the check clears the bank. Deals fall through all the time.
Second, (the most important tip in the entire list, even though I put it last): Choose an investor like you’d choose a spouse.
So that’s my advice. And let me finish with this recommendation, as a last word: Read 10 good reasons not to seek investment for your startup.
This article is part of our Business Funding Guide: fund your business today, with Bplans.
Editor’s note: This article was originally published in 2014. It was updated in 2019.