The key to raising money is building investor trust. There is a formula for doing so. The entrepreneurs that succeed in raising capital for their business know the formula for crafting a compelling story that earns the trust and investment of angel investors. James Magowan is an angel investor I met at an Investors Circle event. As an investment banker with Security Research Associates he helps companies successfully bridge the trust gap with investors to gain the investment dollars needed to grow their business.
I asked James, “What does it take to get an investor to write a $50,000 check for an early stage or start up company?” Trust was his answer.
And the path to building that trust has these five steps:
Business Sense. The foundation of trust is a credible business opportunity. The business opportunity has to look “real” to the potential investor. The business opportunity’s projections of sales and profits need to be supported with documentation supporting the assumptions. Investors expect to see large claims of future sales and profits. But those claims need to be based upon evidence documenting the size of the problem that the business’ product offering will solve. And those claims need to be compelling on why the proposed solution will survive competitive challenges from other businesses.
Big Problem, Big Solution. Angel investors see a LOT of deals. They are most attracted to investment opportunities that solve a big problem. Why? More than anyone else they understand how risky it is to invest in early stage and start up companies. They seek “out-performing” investing opportunities like a Google or First Solar. The businesses that succeed in raising investor funds are tackling really big challenges with truly innovative solutions that have the potential to achieve disruptive results against the existing competition.
People. If the key to raising funds is building trust then the most effective path to building trust is having a trustworthy business team. It is almost impossible to raise money if you and your team have no track record of success. That is why the businesses that succeed in raising funds either have experienced and successful business leaders on their team or they will allow the investor to place the needed experienced leadership on their team as a condition of receiving funding. It is true, investors invest in people.
Prudence. Investors want to invest in results. They absolutely do not want to invest in salaries and offices. The companies that succeed in raising money have a lean cash burn rate singularly focused upon funding just those action items needed to grow the business. Investors expect salaries and offices to be funded from sales cash flows and not their investment dollars.
Communications Excellence. Your investor pitch must be compelling. It needs to be able to effectively progress through the first introductory 30 seconds, to a one-page briefing and then a business plan that answers all potential questions. This is both art and science. The goal is to have a potential investor fall in love. The desired result is marriage. This requires as much professionalism as building your company and products. Effective communications is the path to winning trust and then investment.
The following video interview with angel investor James Magowin profiles his investing criteria and his best practices for helping companies raise capital:
Bill Roth is the founder of Earth 2017, a company that connects businesses with customers who are buying smart, healthy and green solutions. His book, The Secret Green Sauce, profiles the best practices of businesses making money going green. Look for Bill in your city implementing the Green Builds Business that is coaching businesses on designing and implementing projects for making money and a difference created by the U.S. Hispanic Chamber of Commerce Foundation with funding by Walmart