One of the most critical things you can do when raising money for your startup is to put yourself in the investor’s shoes. To get inside their head.
Angel investors in startups are generally enamored with the novelty of your product and the excitement you’re creating. But at the end of the day the number one thing they care about is return on their investment.
Before any investor will give you a term sheet, they go through a process that few entrepreneurs think about. Most entrepreneurs are focused solely on when they can get a term sheet.
But the investor is thinking, “How much can we sell this company for?” Or, “How much could we get in an IPO?”
To succeed in raising money, try thinking about the process like a poker game.
Smart poker players scan the table to see who has how many chips. Why? Because it tells them whose money they can win and how much they stand to get out of them.
Most SmartMoney investors do exactly the same thing before giving you a term sheet. It’s called “Exit Planning” or positioning your company for an exit.
Somewhere in the pitch process, investors will ask you, “What is your exit strategy?”
The simple answer, and the one most often given by CEO’s, is, “We’re either going to go public or be acquired.”
If you really want to set yourself apart from the pack, you need to have a more intelligent answer than that.
Come prepared with current knowledge of recent IPO’s in the marketplace. You should already know if the IPO window is open or shut, and what some of the key valuation points are. You should also know the minimum revenue required to pull-off an IPO in your sector, and whether profitability is required before going public.
I describe how to find the right investors in the SmartMoney Playbook. It’s free, and you can grab it here.
More important, you need to have some company names on the tip of your tongue, since 80-90% of exits are via mergers and acquisitions. That way you can answer the question, “Who are the logical buyers of your business?”
You need to be able to discuss recent acquisitions in your sector. Who got acquired and for how much.
Now, the good news is that you have a distinct advantage in this “poker game” because you’ve had a lot longer to think about it than the investor. This is a great opportunity to show the investor that you think ahead and think strategically. It shows that you’re focused squarely on the investor’s objectives; return on investment.
When you create your target investor list (or have us create one for you), you’ll end up compiling much of this information anyway. Once you’ve completed that process you can clearly convey to investors that you understand who the key players are in the industry, and that you understand the value drivers that would make someone want to buy your company for a premium price.
This data, or market reconnaissance, will tell you who has the “chips” and how many they have. When you confidently convey that intelligence to the investors, they’re much more likely to put a term sheet in front of you.
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