Finding investors: What you need to prepare
Ask FSB's tips for preparing your pitch to venture capitalists.
(FORTUNE Small Business) -- Dear FSB: Where can a successful company that has grown through reinvesting profits look to get investors to help take the company to the next level?
- Michael Solovy, Eden Prarie, Minn.
Dear Michael: This is a problem that many startups face. If your venture is too risky for a bank loan (see "How can I qualify for a loan?"), your next step is to decide if you should approach angel investors, who typically give less than $500,000, or venture capitalists, who usually invest $1 million or more in high-growth companies and in return take an equity stake in the company.
Regardless of which you chose, the same rules for approaching them apply.
Lawrence Gelburd, a lecturer at the University of Pennsylvania's Wharton School, tells his students to divide the prep work into two categories: assembling the analytical data they'll need to present to potential investors, and networking to reach the right people.
"No business plan has ever been funded," he says. "People get funded. When people are deciding whether to give you money, they will look you in the eye and decide whether or not you are trustworthy and will do what you claim with the money."
On the data side, Gelburd recommends practicing answering the following questions so that you have no hesitation when speaking with an investor:
1. Who is the customer?
Once you've got your answers down, work on your charm and investor lingo. Attend pitch lunches to see other peoples' presentations. Network at VC fairs in your area - you can find them by contacting your local Small Business Administration office.
Note that cold calling is useless - and no one knows this better than Kay Koplovitz of Koplovitz and Co., an investment firm in New York City.
"Move through your own contacts - lawyers, attorneys and bankers - to make an introduction," she suggests. "Also, find out if the Angel Capital Association or the National Venture Capitalist Association is holding events in your area. Finally, look to your local university or business incubator for assistance."
Once you get the attention of an investor, keep you pitch brief.
"A two-page executive summary is all you need," Koplovitz says. "Be sure to describe the company's service, market size, your background, the amount you are requesting and what you plan to do with the funds."
Gelburd also recommends offering references, even if they're not requested.
If you are hoping to score a small amount of capital and decide to network with angels, don't underestimate the power of early planning. One day you may need to reach a VC, so be sure to establish relationships with them before you actually need them.
For more information, Koplovitz suggests checking out business school websites and the website of Springboard Enterprises for examples of executive summaries and other resources, and the Kauffman Foundation for information on networking with investors in your area.