10 key steps to find your first investors, based on our own experience.
1) Contribution with own funds
Before you start searching for investors, I believe it is important to invest as much as possible of your own money in your project. Enough to give your project a real chance, but not too much either to avoid being unable to detach yourself from this financial link later on. Indeed, it could become a limiting factor for you to take risks.
Investing your own money is also a great proof of your commitment and dedication to your project. Moreover, it allows you to delay the injection of external capital and to reach certain milestones (e.g. creation of your brand identity, launch of your website or on-boarding of your first clients). This is a first validation of the viability and demand for your project, before you embark on a challenging external capital raising.
For Big Sack, the goal was simple: sell our first 100 bags to customers outside our "circle". Before that, we financed ourselves.
2) The structure of your future round
Before talking about the types of investors, it is crucial to choose the desired structure for the financing round. The most common ones are: simple loan with interest, convertible loan (usually with discount) and priced round. These options all have their advantages and disadvantages, but in most cases, the convertible loan is a good tool. This is the one Big Sack used for its very first round, as it allows you to raise capital without having to decide on the valuation of your company. This tool is also inexpensive, as the contracts are standardized. It is however recommended to have a legal support if possible.
3) Family and friends
This category is quite specific and requires, in my opinion, special attention. Indeed, a lot of preparatory work is needed to identify friends and family members who might be genuinely interested in your project and to avoid those who would consider this contribution as a donation. Also try to identify the gaps in skills within your founding team, ideally to fill them with your "smart investors".
Smart Money > Regular Money
Be professional and diligent. Approach this group of individuals like any other type of investor. Prepare your deck and business plan and have a very clear vision of how the funds you wish to raise will be used and the burn-rate of those funds (especially in the case of a convertible loan). It is important to always take a clear safety net, as things very rarely go according to plan. Also take the time to inform individuals, especially those with little experience in angel investing, of the risk they are taking. This will help avoid unpleasant discussions later on.
By launching your idea with your own funds, as suggested above, you can hope to sign your first customers. They may then become your first investors, either through their company or even as an angel. Because who is better placed to understand the superiority of your product or service than those who have adopted it? You must cherish these first customers, because they will become your ambassadors if they are satisfied. Moreover, they will then share your project with their respective entourage. Once they have invested in your project, it is very likely that these customers will become even more active, because they will now have a clear and precise interest in your project.
However, beware of possible conflicts of interest depending on the field of activity. Indeed, the participation of certain clients in the capital could turn out to be a barrier to your own project, especially with regard to their competitors with whom you might want to work later on.
Angels are a very good category of investors for a young startup. They often bring knowledge and experience in addition to their capital. However, you have to be aware that they are looking for a return on investment. Being very solicited, your plan must be solid and your speech must be well polished to attract them. Your termsheet also needs to be ready, so you don't lose momentum if they are interested.
How to find them? LinkedIn is a very good tool and can help you identify active angels in your industry. It can also be interesting to look at the captables of competing companies, which you can sometimes find online, for example on Crunchbase. Your first angels can also be an interesting source for your startup's future advisors. So don't hesitate to call on them in your negotiations. At Big Sack, the majority of our convertible loan was made up of angels related to our field of activity.
6) VCs (Venture Capitalists)
I am not going to spend much time on this, because in 99% of cases, it will not be an option for you at this stage. VCs want to see a minimum of traction and your ability to raise money before they trust you with their own money. Exceptions to this rule are projects with very high IP, second time founders who have made a big first exit, or certain niche sectors like BioTech. However, do not hesitate to network with these players early on in order to establish a strong relationship for your next rounds. Networking is the lifeblood of a startup.
7) Business and/or academic investments
Nowadays, it is common for medium and large companies to invest in startups related to their sector(s). Either in view of potential synergies, or as a hedge to their own business line. This can be done through a Corporate Venture (CVC) or directly through their balance sheet.
The benefits and risks are quite similar to those mentioned in the section "your customers". However, it is even more important here to think carefully about who you are going to partner with and to plan ahead. The question to ask yourself is quite simple: Could this company buy my startup one day? And if the answer is yes, do I want it?
For those of you still studying or for young graduates, there are sometimes programs in your schools or universities that can be of great help in the early stages of your company's life.
8) CrowdFunding platforms
There are 2 main types of CrowdFunding platforms.
A) Those that promise investors to get the product or service in sneak preview or at a special price. Kickstarter is one of the best known.
B) Those that offer a real investment in exchange for shares in your company, like CrowdCube.
This type of funding can be very convenient for financing your inventory and launching your production line with limited resources. While this has been a pretty easy way to raise money in the past, these platforms are now full of projects, most of which don't reach their goals (which can, in some cases, completely negate your project on the platform). So you need to have a solid business plan to stand out from the rest of the projects and be sure you can meet production deadlines to avoid ending up with frustrated customers.
It is also clear that this type of platform works mainly for items that are ideally meant for mass market.
9) Non-dilutive public or private grants/loans
Grants or non-dilutive loans are a boost for startups. Unfortunately, it is often necessary to have reached a certain stage of development to be eligible. There are a multitude of private or public grants depending on the industry, so it is worth doing some research to find the ones you are potentially eligible for.
In Switzerland, the most interesting ones are, in chronological order of development:
- Swiss government technology fund for startups with a positive ecological impact
- FIT Tech, minimum 500k of turnover
- SEF Growth (financed by the UBS), minimum of 1mil of turnover
10) Do not lose hope and do not hesitate to go back to the previous steps if necessary. The important thing is not the destination but the journey!
Feel free to add to this guide in the comments with your own tips!
Christopher Chuffart, co-founder of Big Sack