You know your idea has the potential to be the next big thing but you’re low on funds and need somebody else’s moolah to make it happen. TV shows Shark Tank have made the business of pitching for investor funding into a spectator sport and like most sports, there are winners and losers.
For every entrepreneur to score vital expansion capital, there are many others whose killer concept failed to inspire a backer to open their cheque book.
So what can you do to ensure you’re in the lucky minority who manage to get a resounding “yes” when you come calling cap in hand?
Get inside their head for starters, says Jack Delosa, founder of The Entourage, Australia’s most successful startup school. Most rookie entrepreneurs assume investors will be primarily interested in the potential upside of the opportunity they’re offering – and they couldn’t be more wrong.
You need to put yourself in the shoes of an experienced, pessimistic investor and ensure they feel safe and their resistance has been lowered before you talk about the opportunity your venture presents.
Think like an investor
“There are three questions on every investor’s mind,” Delosa says. “How will I lose my money? When will I get my money back? And how much money might I make?
“All they are scanning for initially is the potential downside, every risk associated with the business.”
How can you eliminate their concerns? Not with grandiose statements about how you’ll be the next Uber by year’s end – but with a clearly expressed proof of concept, a strategy to get it up and running and details of the team you’ve pulled together to make it happen.
Be clear about the return
Once you’ve shown them you and your team are doers, not dreamers, who won’t blow their dough, it’s time to let them know when they can expect to get it back.
“The entrepreneur needs to have done some thinking around when the investor can expect a return,” Delosa says.
“It could be when you’ve reached profitability of a certain level, or attained a certain number of customers. You need to nominate a date or a milestone or an event when the investor has the option, but not the obligation, to exit their investment.”
Only once you’ve addressed these questions thoroughly should you give yourself permission to paint a picture of how the business may look in two to five years’ time.
The entrepreneur needs to have done some thinking around when the investor can expect a return.
Lower resistance before heightening acceptance
“Lower their resistance before you heighten their acceptance,” Delosa says.
“Most people don’t do this. It’s more about blind optimism and ‘give me some money’ but that approach that will see you shot down in flames.
“Entrepreneurs need to realise investors are almost the exact opposite of them. You need to put yourself in the shoes of an experienced, pessimistic investor and ensure they feel safe and their resistance has been lowered before you talk about the opportunity your venture presents.”
Sylvia Pennington is a Brisbane-based freelance journalist who writes about small business, information technology and personal finance.