When is the right time to pitch to investors?
We're looking to build a mobile app for photo sharing. We have a fantastic idea, can monetize it in future phases, but are trying to go at this with as low of a budget as possible. We WANT to bring investors in, but need to understand WHEN.
What has been your experience in doing so? When's the appropriate time to do that?
First, do you really need investors? Can you get the funding you need on your own? If so, do that first. Why reduce your equity or control.
Investors should be solicited when you have a complete business and marketing plan. Are your ducks all lined up. Do you know your cost and have a definitive plan detailing how the investor will make money as a shareholder. Do you know the actual value you are offering them.
You must be able to demonstrate how the investors money will be used, the benefit of having investors and what will they get out of investing in your firm.
When you can do this you will be ready to ask people to invest in your business.
As a Business Angel, I will share you one of our secrets. The companies that we are most interested to invest are those that don't really need us.
In tech angeling it seems that lean startup is the trend so please read Steve Blank's and Ash Maurya's blogs to start as lean you can.
Now, start by creating a minimum viable product (using your resources or FFF), go to market, measure everything, learn from the market reactions. Then adapt the MVP or pivot and repeat the process. In 6 months if you have an exponential growth of users, customers, revenue, give me a call.
Appropriate time is when you have a good fix on revenues budgeted best case, worst case, and realistic.... ANd you know your costs.... And you understand how much you are willing to give up to the investor..
Some brilliant answers so far. I'll just add - when you are ready.
At any point and stage you can pitch to a potential investor,it just depends on what kind of investor you are pitching to. Some want to be involved at a development stage all the way to some who will only look at it when it's already been taken to market and selling. My experience and observation with tech start ups in raising funds is more about the right investor rather than the right time.
My take on your query is as below:
Having a good idea is one part of the business and executing is quite another.
Execution throws up valuable insights which leads to course correction and strengthening of value delivery.
I would ask following questions to arrive at a reasonable clarity on next steps:
Before you get investor to know about your idea and business, do you understand your own business well?
Have you established a clear proof of concept through a reasonably strong pipeline of customers/users of your product ?
Have you reached a stage wherein scaling up would result in increase in generation of multiple equal to or excess of 5X? (multiples vary from industry to industry- however, 5X is somewhat base expectation)
Angels and investors are particular to look at proof of concept and delivery on promises. If your own understanding of your business is not strong enough, then it is not a great idea to bring in investors when you are on a learning curve.
Hope this helps.
All the best for your venture!
When you completed your home-work in black and white, complete homework meaning complete business plan with 17 headings,the investor listen your voice,...
Why do you need to bring investors in? If you can sustain the business self funded than why? Bringing in investors bring a whole different set of responsibilities and expectations which now require their consent and approval. However, if there is no way else and you have to do it, do it when you no longer have any option. Do it when you have a compelling business model which will make them convinced that your business is worth investing. Do it when you are ready to be accountable to others for your business decisions. You can still do it without these expectations but you may face less than attractive terms to your benefit. Otherwise continue bootstrapping.
I believe the best time is when you are able to generate interest in your services or products and you have completed the ground work.
The absolute optimal time to consider investors is when you have the financials that prove your app has commercial viability. The best revenue model is a paid subscription. Kick that model off with a low entry trial with a clear statement to end users that they will be charged monthly a specific amount to use your app service.
Until you have a commercialized product/service you are premature seeking angels, PEIs or banks. Your investor wants to see that you can monetize. Then your investor can 'see' their return OF investment, and, ROI. You're time is best spent at this stage in live market testing to create that minimum viable service that your market will spend $1 for a trial, then move into a reasonable monthly investment. Be ready to defend your idea against Instagram, Flickr and Tumblr. Investors are not mindless. They have a clue and will ask you the unexpected. So do your due diligence, generate revenue then define the type of investor that will be best for your company and it's idea. Hope this helps.
When you have something to offer the investor that they want. So, what would an investor be looking for? 1] A perceived level of risk within their comfort zone; 2] A clear way to get their money back; 3] A chance to make a decent/acceptable profit.
If you have those three things, then it is time to pitch an investor.
The best time to do that is several months before you run out of money. You need to develop a business plan and motivating presentation. Best learning experience is "Shark Tank" show on TV in terms of being prepared to respond to investors questions. Investors want to know - what is unique about your value proposition? And, when will I get my money back?
Brian I would start speaking to potential investors ASAP and appraise them on what you are doing and your critical milestones from your business plan. For many of these investors it might be too early for them to invest however if you keep them updated on your progress and exceed your key metrics consistently you wil most likely find they will start showing interest in investing. In summary don't wait until you need the money or believe you could raise the money, start the discussions now.
I have been advising start ups in technology for many years and the one common thread around investments revolves around what you intend to do with your new company. It you are creating it to be sell it and then turn around and do it all over again- involve them early on. Make sure you have a realistic and compelling business plan, a plan for alpha/beta testing and at least a small group of early users. If you truly want to grow your company and have master control in its destiny, then hold off using a private equity or VC as they will forcibly put their stamp on your future. If you are looking for a couple thousand to a couple of hundred of thousands- you probably want to look to friends and family or look at crowdsourcing the initial round. I would wait until you have a concrete alpha version, some users and a solid plan to get funding to hire engineers or developers.
Once you have your business plan in place, a solid business model, and all 't's crossed and 'i' dotted, the next step is to make sure you have yoru financial books in good enough order to build solid financial projestions. Investors want to easily see exactly how you are going to make the money to pay them back, so without a detailed financial plan and projections, they will not entertain your pitch. If you are not sure, contact a local small banker, and ask them to mentor you through the process. It just depends on what level of investor you are pitching to, and how much you want.
Sources of Capital
Bootstrapping – We start by looking internally for our capital. The first source is you. Here is where your passion and dedication will show itself in how and where you can find capital right around you. This may be in the source of credit cards, savings, and/or assets. This is a valid way for business owners to treat valuable resources at any stage of their business' growth. Normally, suppliers extend credit to regular customers for 30, 60 or 90 days, without charging interest. However, when you first start your business, suppliers will want every order COD (cash or check on delivery) until you've established that you can pay your bills on time. While this is a fairly normal practice, in order to raise money during startup, you're going to have to try to negotiate a trade credit basis with suppliers. One of the things that will help you in these negotiations is having a written financial plan.
When having to purchase equipment, remember:
Two types of credit contracts are commonly used to finance equipment purchases:
1. The conditional sales contract. The purchaser doesn't receive title to the equipment until it's fully paid for.
2. The chattel-mortgage contract. The equipment becomes the property of the purchaser on delivery, but the seller holds a mortgage claim against it until the amount specified in the contract is paid.
Remember that leasing is an important source when dealing with either equipment or a facility.
There are many ways that a lease can be modified to increase your cash position. These modifications include:
A down payment lower than 10% or no down payment at all.
Maintenance costs that are built into the lease package, thereby reducing your cash outlays. If you needed employees or a repairperson to do maintenance on purchased equipment, it would cost you more than if you had leased it.
Extending the lease term to cover the entire life of the property (or use of the property for as long as you wish to use it).
A purchase option that allows you to buy the property after the lease period has ended. A fixed purchase price can also be added to the option provision.
Lease payments that can be structured to accommodate seasonal variations in the business or tied to indexes that track interest to create an adjustable lease.
Bootstrap financing really begins and ends with your attention to careful management of your financial resources. Be aware of what you spend and keep your overhead low.
Seed Funding – (Aka the ‘Seed Stage’, set-up level of an organization)
This is the usual step after you have exhausted your own internal capital. This is usually brought together through family and friends, although if may also come from an outside smaller investor. You can’t usually expect to raise a huge amount here, and you must be careful not to strain your relationships with these people into the future. Tread upon these sources lightly. The amount of money is usually relatively small because the business is still in the beginning stages. Seed capital is usually needed for research & development, to cover initial operating expenses until a product or service can start generating revenue, and to attract the attention of angel/venture capitalists.
Angel Investors – These are considered smaller-scale investors who will put up capital for those organizations they feel a comfort level with, and the money comes from them alone, although they can sometimes form an angel group. They will usually invest in exchange for convertible debt or ownership equity. Angel investments can be perfect for businesses that are established enough that they are beyond the startup phase, but are still early enough in the game that they need capital to develop a product or fund a marketing strategy, although you could be giving away anywhere from 10 to more than 50 percent of your business. On top of that, there's always the risk that your investors will decide that you are the business' greatest obstacle to success, and you could get fired from the company you created. The amounts dealt with in angel investors usually run anywhere from $100,000 to $600,000.
Venture Capital – This is a type of private equity. It is provided to early-stage, high-potential, growing start-up companies. It is money raised by venture capitalists who partner with other sounds sources to raise large amounts of funds to invest in very promising, high-growth companies, almost always through a liquidity event. Before you can fit into this category, you will need to be able to project growth to over $100 million in less than 7 years. Venture capitalists are usually looking for organizations whose growth will exceed one billion-dollars.
Bank Loans & Credit Lines – These will be hard to secure without having the proper collateral that a bank is looking for. You will need to have valuable assets for the bank to consider as collateral. It is sometimes possible to project future income using receivables and contracts from clients outlining payments for your services or products. The amount of this income will usually set your credit line amount, and then that amount can be raised as you continue to show an increase in revenue. Getting professional advice is advisable here since every situation is different and unique to itself.
Developing Your Pitch to Investors
Remember that investors hold the initial edge since you aren’t going to visit them unless you are in need of capital. Therefor, it may be advantages to begin developing relationships with investors before you actually need them.
Relationships are so often the key to business, and working with investors is no different. Use them as mentors and coaches as you are in your infant stages. Let them in on what you are working on, your plan as you develop it.
Share specific goals as they are designed, and especially as you reach them. You may even share benchmarks with them that you know you can actually exceed, which will show them you are moving forward in a positive manner!
This will create a reputation of credibility with your potential investor. This will also verify to them why you need a line of credit, since it seems you are growing faster than expected.
Just ensure that you do not over-sale yourself to a point that you cannot cover any capital that is provided to you, and this destroy the credibility you have worked so hard to build up.
Karl outlines it well below.
Don't take this for granted, as if you go out and pitch without having your ducks in a row...you will burn a bridge. They will remember.
We'll you already have the idea of the app and I take that you know the way for a good elevator pitch. Other than the right time to pitch, make sure your prospective/potential investor is inclined to the kind of investment.
THE RIGHT TIME? we'll most people talk a lot few are up for the moment set the most convenient time for the investor where he/she is entirely free for the day or most atleast and while your at it take your time to relax and tell yourself that "they wont invest anyway, so you might as well lose the worries just get this over with" like in the movie P.S. I Love You when Gerard Butler and his friend were applying for a loan to start up a business. Well, I hope I have been helpful to the subject and good luck!
I started thinking about bringing investors in as soon as I had a confident business plan with eye catching and appealing phrases and a complete breakdown of the financials of where we are and the amount you are seeking and the profitability now and the future, with a viable exiting plan after so many years . Be prepared to explain in great detail on the amount you are seeking and the amount if any of your business you are willing to give up for that amount. There are investors or lenders out there that will do a deal with you over a 18 - 24 month period but charge 13 - 14 % on their return in that period of time with a clause that there is not a penalty for paying off early but do want you to at least keep it for 12 - 15 months. If you want to email me personally I can recommend some of these lenders or investors to you.
I started seeking investors as soon as I wanted to start my business.
It kind of depends on your situation.
Understand that the process of raising capital can take a while. Up to a year.
I would start working on it at least a year before you think you will need the funds.
From my experience, investors are looking for maturity and passion.
Maturity as in how much work have you done, are you operationally and fiscally responsible, and is your company core/fundamentals, including your culture, established, etc.
Passion as in are you pitching because you believe in the idea and need money to grow or are you just looking for money to do less yourself.
Have a team - preferably one with history together.
Have a solid business plan, pitch deck, and financials. Include at least:
The ask (how much and what for?)
Know what "kind" of money you want - tailor your pitch to suit.
Practice your pitch and explanation (the "secret sauce").
Own your content, but be humble.
Be sure you're asking for enough money.
Know how you're going to make money.
Know your competition and your market.
Start looking for investors.
There are many variables, particularly regarding how to develop a pitch plan and general proposed deal terms. Carefully consider them. You would not pitch an angel like you would a VC firm, for example.
Above all, you'll want to be very comfortable pitching this. Practice pitching it, get people to ask tough questions, do lots of dry runs, etc.