Before you even think about approaching an investor with a funding proposal, you must consider the critical questions that you will be asked.
The big one is: how much cash have you invested in the idea?
You may think that you have invested your time.
Your time is valuable.
But how does an investor evaluate the value of your time if you have no real traction so far?
And on that basis your time should be a given if you are pitching an idea to an investor.
And there is plenty you could be doing to add value to your idea, which only involves your time.
Things you can do if there is no investment forthcoming.
A plan of what you will do if no more funding arrives in the short-term.
Because if you are thinking “I’ll do all of these things once funding arrives,” you do not have a good business idea.
It’s just an idea.
Which will be hard to get funding for.
Unless you leverage your relationships with your friends and family.
And risk their money and your relationships.
It’s a high-risk strategy.
But it at least demonstrates some sort of belief in your project.
Because a professional investor knows that if you have self-funded or attained friends and family funding, you are already more invested in your idea.
And are risking a lot already.
Especially your relationships.
So, if you haven’t yet asked your friends and family for funding, but are seeking professional investment…
…this will likely send a red flag to a professional investor.
Many of them like to see ‘Hurt Money’.
This is money invested in a business which guarantees hurt to the founder if it doesn’t work out.
A clear demonstration of some sort of shared risk if they get involved.
If you don’t have hurt money in your business, it will likely be nowhere near as appealing to an early-stage investor as it needs to be.
In order to get into the less than 1% of pre-revenue startups that attract professional investment.
You must believe in your project.
And create the hurt money that increases motivation to succeed.
Without this, you are almost definitely wasting your time approaching angels and VC’s.
Why should they invest in someone they don’t know?
And therefore don’t yet trust.
There is also a fine balance here.
Suppose you get the concept of hurt money, decide to go all-in.
You could remortgage your house.
That would demonstrate hurt money.
But that would likely send a red flag in the other direction.
Taking so much risk that you and your family could end up homeless is likely a step too far.
That sort of stress could lead to mental health and relationship issues.
But the equation you must solve is:
How do I show an investor that I am already invested into my idea?
And starting the ball rolling with a strategy in place of what you can do if no funding comes in is essential.
How long can you sustain/build this before the cash runs out?
Which is why many startups have jobs simultaneously to starting their businesses.
Which then creates a time issue.
If an investor goes in would you be able to quit your job and go all in?
If the answer is no you are almost definitely wasting your time approaching professional investors.
The 0.7% of pre-revenue businesses that get professional investment will have at least five of the following:
- A clear problem solved
- A unique solution to it
- A patent
- A working platform
- A growing audience/social media presence
- A great team with plenty of management experience
- Grant funding already in the company
- Strong distribution networks
- Self-investment (cash paid into the company)
- Key partnership agreements in place
That should get you thinking in the right direction.
And here’s a little ramble I had last week to demonstrate the point further…