What is the right time to approach investors with my business idea?
I know that it takes a while to bring investors on board but I'd love to know what you think about whether or not there is a right time and what dictates being READY for investor mtgs.
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This is Debleena from StartupsFM. We had an angel investor write this column for us at http://startups.fm/2013/07/30/what-lures-angel-investors-to-write-big-cheques-for-startups.html. Hope this helps. Let me know if you need something more. We are happy to help!
There is no "right" time to talk to Investors - just the right time to talk to different kinds of Investors ....
Start your business on a shoe string ..... bring in revenues, profitability is dispensable but demonstrate commercial viability .....
Till then, rely on savings / Family / Friends / Market Credit / Equity based contracting / desperate vendors / Bank Finance on personal / acquaintance / 3rd Party Collateral - think smart and DO not "Plan and Project" ....
Funding is available for expansion and scaling up .... not to prove commercial viability at the Investor's expense ....
Evaluation for a Start-Up is based on idea, promoters and their previous track record and expertise .... there is no "methodology" at this stage - the primary driver is the level of thought displayed by the promoters and the comfort they generate in their ability to actually implement their vision ...
2nd Stage Start-up evaluation is again not subject to any "methodology" - its a function of performance as shown in the movement from inception to stage 2 and again encompasses all the drivers of a stage one start-up.
Further, "valuation" as distinct from "evaluation" is entirely based on negotiation and classical methodologies are used entirely for justification of the negotiated valuation to the various "Investment Committees" involved.
Hope this helps .....
Thank you all for your SUPER useful insights! I learned that I am indeed not ready yet to ask for funds, but that it's never too late to share ideas and get feedback. Will make for great prep for when I eventually do end up raising funds.
If you watch the TV show Shark Tank, you will get a good idea of how investors think. The other comments are in line with this process.
The most direct and factually complete response is from Dean Rutter (below). It is the most sobering and dissapointing response; however, if you need startup funding and do not have access to 'prove the concept' to profitability - you will not get interest from any Angel or VC. IF you have a great idea that NOBODY has every thought of in the history of manking - cover your self with NDA's and Non-Competes prior to sharing your idea with anybody!!! Would hate to see you wake up one day and find someone has taken your unprotected conversation for the benefit of themself/themselves. Best of luck.
When it's no longer a business idea and you have strong evidence that the new business is commercially viable. Investors all expect to get their principle back and be rewarded for their risk. Until you are both able to communicate how that will happen (or at least what needs to happen) and the risks associated with the investment, you will only get money from those that love or believe in you unconditionally. Hence the Friends & Family seed round.
Once you meet the above challenge it next comes down to establishing a valuation where taking on investors works for you and the investor. The greater the business progress, the less you need the investment, the more you prove you're the right person to lead the business, the better the operating results, the higher the valuation and the more likely you will be willing to take the investor's terms. The answer, then, is a function of how much of your company you're going to give up to gain access to capital.
The only other thing to contemplate is that before approaching investors, be certain that you have exhausted all other funding options. There are so many ways to get a business funded if one is cagey. Talk to successful entrepreneurs, they will share lots of stories on how they grew their businesses without cash.
You need to define the word "investor" as you wish it to be. A big idea and conviction may get you an Angel partner who can help with the development of an operational and financial plan.
If you need significant funds from professional investors, Angel or Institutional, you will need a good description of what you have, who needs it, how you will deliver it and for what price. Behind these simple words lies a host of variables. Make in-house or out-source is a question that can be asked of everything from the finance or HR function, to industrial production, delivery, sales, marketing. The amount of thought needed to develop a good and workable structure is much more than people think and is more important than simplistic plans such as "the market is $2 billion and we will get 2%". If you have assembled a team which can present a robust and reasoned approach to commercializing your idea, that is the time to seek funds, if you actually need any.
Ideally, you approach the investors when your valuation is highest and when your need is lowest. Sorry, but this is an intentionally vague answer that masks the actual complexity of any useful answer. First, you will need to work out your business plan, and your financing strategy - to figure out whether you need outside investors and what kind of financing will work best for you. Just like a good business strategy, you should have a financing strategy.
There's no one right answer here. The right time is when you and your team can demonstrate the opportunity for the right investors (WIIFThem) and you have the legal and compliance documents ready, know what terms you are looking for, and can present a compelling brief pitch of why they should invest in you, why now and why this risk/investment will provide a much better return than the bank or stock market.
You will keep control and a greater ownership incrementally if you are beyond the idea and paper napkin discussion --> business plan and financial forecasts --> prototype --> 1-2 alfa clients --> 5-6 beta clients --> in revenue.
At each stage, you are proving a greater likelihood of success on your own and less 'need' for what they bring to the table (resources or expertise).