Many founders fall into the same trap: they focus all their energy and resources on building a product and finding customers, and when they come up for air, they realize that they need to raise outside capital. So they scramble to craft a pitch, find potential investors, and ask for money — and they usually fail. They end up with no money, and, sometimes, no company.
Raising capital is often the hardest and most critical part of launching a business, and it can be very time-consuming. The average outside equity financing round, from the beginning of the roadshow to when the money is wired, takes six months. But getting to that point can take even longer, especially since investors like to fund projects from founders with whom they’re familiar. That means you may need to spend twelve months building relationships before you can successfully raise money.
Relationship fundraising, as opposed to transactional fundraising, may be time-consuming, but it’s the key to getting funded and building a set of core advisers and investors who will back you for the long term.
Here are some tips to get started:
If you want money, ask for advice.
When I was starting one of my first ventures, Teneo, a nonprofit national civic leadership program, a successful businessman and philanthropist invited me to lunch with several of his friends for a brainstorming session. After an hour of productive conversation about my concept, the host asked me, “Did you achieve everything you wanted to during this lunch?”
A bit flummoxed, I answered, “Yes, yes, thank you for hosting, I learned so much.”
He paused. “Well, how about $250,000?”
And that was the first money I ever raised — without even asking for it.
The experience taught me that if you want money, you should ask for advice. When you genuinely seek advice from someone, you are humbling yourself while elevating them to a position of authority, demonstrating your ability to listen well and ask great questions, and subtly letting them know that you’re raising capital without directly asking them for it.
For my last company, Outbox, a service that digitally delivered all of your snail mail to you online, we made a list of 20 subjects that we needed help with. They included everything from logistics to warehouses, government partnerships to direct mail. We then created a list of 100 investors and advisers who had expertise in areas that were key to our business, and we reached out to everyone on the list.
Often, we found that these experts were eager to talk about something that was both in their domain of expertise and also new and exciting. We were not pitching investors just because they had money; we were genuinely seeking advice from people who could really help us solve tough problems.
Build trust before you ask for money.
On first blush, the fact that investors only put money into companies of people they know seems like good-old-boy nepotism. And, indeed, there are real problems here along demographic lines. But on a deeper look, at least some parts of it make sense. Investors in early-stage companies are not only evaluating your business acumen; they’re assessing your personal characteristics as well. They want to know if they can trust you. Trust is very hard to build in a first meeting, especially if you‘re asking for money. The challenge is to build rapport with investors before you actually need capital.
To build trust, consider a few ideas.
- Establish common relationships. Trust is often translated across common friends. I trust Sally. Sally trusts you. Therefore, I trust you. Be sure to know about common relationships and use them appropriately. After looking up shared relationships on Facebook, Twitter, and LinkedIn, I might say, “I saw we are both connected to Molly from the Balloon Factory. I have to ask, how do you know her?” Sometimes you strike out: “I have no idea who that is,” they could say. But often I get a fun story and a chance to build rapport.
- Be conversationally humble. Too often, founders are such passionate believers in their own cause that they lose the ability to hear and process fair criticism.
- Show that you know what you don’t know. If you get a question about your company and you don’t know the answer, admit it and own it. “You know, I’m not sure about the patent process timeline in Malaysia — let me check on that and get back to you,” might be one way to play it. And above all, never make something up.
Show that you have a plan to figure out what you know you don’t know. If there are core gaps in your knowledge that are problematic for your business, identify them and show you have a plan to solve them. “We do know our regulatory strategy for each major city we enter will be very complex; right now we do not have that strategy, but we are interviewing several law firms in the hopes of hiring one.”
Show that you are eager to fully hear out someone’s criticism, skepticism, and/or fears related to the things you know. Though it is easy to jump in and even interrupt someone when you have stats ready to answer their questions, stay curious and hear them out. You may learn of a new way they are thinking about the issue, and at the least you will communicate to them that you value what they say.
Meet investors when you aren’t raising money.
It’s true that the most natural time to meet investors is when you’re raising money, but there are many other avenues to explore as well. I have personally sought out top investors in an industry to get feedback on my company. When I reach out, I ask something like, “I’m building a company in the XYZ industry and have really admired your writing and investing in the space. Might you have 30 minutes for me to share what we have learned and get your feedback?”
Disciplined investors are keen to meet with new entrepreneurs often, even if you’re not raising capital. In addition to investing, their job is to know the latest in the industry, so use that to your advantage. Treat the meeting as a chance to share with them things you have been learning.
Shy of a formal meeting, consider these three approaches:
- Offer to help, and actually do it. I met one of my current investors in Able, a financial technology company that makes the lowest-interest loans online, when he actually reached out to help. He knew that we were not yet raising money, but he wanted to find a way to build a relationship. He was able to make a dozen introductions for us, all just as a fan of what we were doing. Later on, when it was time to raise money, we knew Chris was the kind of guy who did what he said he was going to do.
- Meet them out of the office. Many investors, especially younger ones who have a mandate to bring in new deals, go to hundreds of events a year, including happy hours, conferences, demo days, and alumni events. Find ways to identify these events and get invited, and then learn how to get the most out of networking events. Introduce yourself widely. Have something (brief but interesting) to say about yourself. Ask good questions. And then find a way to follow up.
- Engage with them intellectually, even virtually. Some investors publish very thoughtful analyses about all kinds of things on Twitter and even blogs. Consider offering a counterpoint or asking a probing question, or track down their email and send them 200 words and some data on how they might refine or add to their argument. Don’t hear me wrong: please do not pick fights with investors. But you should start engaging conversations.
When I started out fundraising, I put investors on a high pedestal. They intimidated me. But, after a while, I realized that they weren’t much different than me. Many investors have run companies, just as many founders have been investors. The tables can turn quickly and life is long; even in my short career, I have had investors whom I pitched (and told me no) write me months later to ask for an introduction to another investor because they had founded a company and were raising capital.
There’s no doubt that relationship fundraising can be an intimidating process, but with practice you’ll learn how to be yourself in meetings and begin to build authentic relationships with people. It may take more time than you want, but by forming meaningful relationships rather than just making transactions, your business will be better off in the long run.