The purpose of this article is to outline how a startup can find new investors.
You can download a PDF of this article from: Finding new investors
Building relationships with potential investors is the foundation for raising funds.
What is the source of VC’s (Venture Capitalists) closed deals?1
- 12% of closed deals resulted from a startup making an application.
- 65% came from referrals and the VC’s professional network.
- 23% are proactively self-generated by the VC.
Warm introductions to VCs are the most likely way to result in a closed deal. A warm introduction comes from someone the VC knows and whose recommendation the VC trusts.
Building a trusted relationship takes time
Investors give money to those they trust. It takes time for the startup founders to build that trusted relationship. The founders need to contact investors before they need money is needed, update the potential investors each month, be honest and transparent, and achieve the short-term milestones they said they would achieve.
You will have to contact and meet a large number of potential investors
The statistics for an average seed round raise in a U.S. study were2:
- 58 investors contacted
- 40 meetings with investors
- $1.3 million raised
- 5 weeks to close.
- The average pitch deck was 19.2 pages
- The average time an investor spent to read the pitch deck was 3 minutes and 44 seconds.
There are six ways to connect with potential investors
#1 Introductions from your lead investor
Your lead investor has the reputation of investing in good startups and also knows a number of other startup investors. Your lead investor will make the effort to draw in other investors.
#2 Warm introductions from someone the investor knows and whose recommendation the investor trusts
The following email template is what you send to the person doing your warm introduction. The only work they need to do is forward your email
A sentence regarding catching up/meeting/talking with your contact.
One sentence bio regarding a big achievement in your career relevant to your startup.
Three sentence paragraph about your startup. Your one sentence pitch. Customer traction growth plus a milestone or two. What you’re seeking e.g. seed stage investor.
One sentence thanking your contact for their introduction to XYZ.
A paragraph regarding XYZ showing what you’ve learned about them and why they might be interested in your startup. Ideally you could provide some value to the investor e.g. knowledge or someone they’d value connecting with. This could take a couple of hours of research.
#3 Presenting at pitch competitions and other events with investors
This can include events such as: demo day at your accelerators, a booth at Collision. Identify potential investors who are interested in you. Suggest a follow up call or meeting. Get their contact information and follow-up within 24 hours.
#4 Attending events where investors attend
You and the investors are all part of the audience. Events can include: pitch competitions, conferences, etc. For you, this is a non-pitching situation. Let’s assume there are a large number of investors present and you’d like to meet as many as possible. Carefully plan out your three-minute meetings. The objective or each meeting is to create a relationship, not to make a pitch. The different stages of the three minutes are:
- Initial introduction: smile, be enthusiastic, and be 100% focused on the investor.
- Learn about the investor: be curious and ask questions such as; why they are at the event. Do not pitch. It would be great if you’re able to provide some value to the investor e.g. knowledge or someone you can introduce them to.
- Wait for them to ask about you. Then share your one sentence pitch followed by one sentence regarding customer traction, major milestone achieved and what you’re seeking e.g. a seed investor.
- See how they respond. If they are interested and ask more questions about your startup, you have a prospective investor. If they are not interested, and do not ask questions about your startup, do not pitch your startup.
- Meeting conclusion: For prospective investors, you’ll need to judge the appropriate request for next step. Your options are: are meeting, a call (Zoom, Skype, or phone) or an email. Get the prospective investors business card with contact information, or connect on LinkedIn immediately. You will be doing no follow-up with non-prospective investors.
Within 24 hours of the meeting, follow-up with the prospective investors.
#5 Scheduled meetings with investors at events
Conferences and other events often enable startups to schedule meetings with investors.
#6 Cold call emails.
The goal of a cold call email is to generate sufficient interest to get a reply back and begin an email conversation. This is the beginning of a trusted relationship. The goals are not to set up a meeting, get a check, etc. The cold call email do’s and don’t include:
The cold call email must be short enough to be read within 60 seconds. An email which takes two or more minutes to read will be deleted by the potential investor because she simply does not have time to read the large number of emails coming in. The potential investor must be able to read the email, think about it and reply within 2 minutes.
The template for the cold call mail is:
- Write a subject line than generates interest. If your subject line, does not generate interest, your email may be deleted. The investor often will read your email on her phone. The first 30-40 characters of the subject line are key and you only have about 90-100 characters to generate interest. The two most important things in the subject line are: customer traction and your ask e.g., “$1 million ARR, seeking seed VC”.
- The first paragraph describes the problem being solved.
- Next a paragraph with bullets of key metrics e.g. customer traction growth, revenue growth, key milestones achieved.
- Next a paragraph of what the company does.
- Then a paragraph showing what you’ve learned about the investor and why they might be interested in your startup. Ideally you could provide some value to the investor e.g. knowledge or someone they’d value connecting with. This could take a couple of hours of research.
- Concluding with an ask for call or meeting.
- Attach the pdf of your pitch deck. Do not have a link to your pitch deck.
Some do’s and don’t to consider for your email are:
- Build a list of potential investors and research them. Do not contact investors who would not be interested in your type of startup e.g., the investor only funds U.S. headquarters companies and your headquarters is in Canada. Research the potential investor to understand what they want. What have they said about their investment targets: industries, geographies, technology, stage of company, types of founders, valuation, etc. How much money do they typically invest? Are they a lead investor or do they require a lead investor?
- The email must state: the problem, the solution, customer traction, if you have revenue paying customers and what the customer growth has been, market size, who the co-founders are, and the unique insight or special sauce the startup has.
- The email must not contain: The story about how the company came about because the history does not determine whether or not the investor is interested.
- The email must not contain the CEOs biography.
- Do not use industry specific jargon or acronyms because the person reading the email may not be an industry
- The email must come from the company’s email with the person’s name e.g., email@example.com
- Don’t send a follow-up within a month. The investor has made the decision on whether or not to reply. When doing a follow-up, there should be some new information, especially regarding customer growth.
- Attaching a standalone pitch deck is optional. Your research of the investor can indicate what they want included in a cold call email. Do not have a link to your pitch deck – make it easy for the investor to look at the pitch deck on their phone.
- Email must contain facts, not vague claims.
- Use a CRM to send the email so that you can track whether or not the email has been opened. Do not do a mass emailing. You’ll also need the CRM to manage the large amount of information you’ll be collecting about a pool of potential investors.
Your next steps
- Define your fundraising plan. You need to start building investor relationships before you need money. The plan should include time and funds to travel outside of the Toronto area.
- Implement a CRM to manage your investor relationships and related investor information.
- Research investors to build a list of potential investors. Resources to find potential investors include: your existing network, LinkedIn, AngelList, Crunchbase, Gust, Hockeystick, Startup HERE Toronto funding database, and VCWiz.
1 Paul Compers, Harvard Business School, Will Gornall, University of British Columbia Saunder School of Business, Steven N. Kaplan, University of Chicago Booth School of Business, Ilya A. Strebulaev, Graduate School of Business Stanford, “How do venture capitalists make decisions”, April 2017, Page 42 This survey of VC firms included: 63% of all VC US assets under management, 9 of the top 10 VC firms and 38 of the top 50 50 VC firms.
2 “What we learned from 200 startups who raised $360 million”, Professor Tom Eisenmann, Harvard Business School, and DocSend
“How does a startup communicate with potential investors?” https://koorandassociates.org/points-of-view/selling-a-company-or-raising-capital/how-does-a-startup-communicate-with-potential-investors/