So you’re putting together a tech startup but need money to make it work. How do you approach investors and make a deal?
At an evening panel this week that was part of the Startup Spring festival, three successful startups and a seed fund from the Tank Stream Labs co-working space in Sydney offered tips on how to increase chances of success when pitching to investors.
The panel included Tim Fung, founder and CEO of Airtasker, a website that allows people or businesses to post tasks that potential “runners” can bid to complete; Daniel Oertli, co-founder and CEO of Roomz, a room rental service; Andrew Campbell, co-founder of GoCatch, a mobile app for hailing cabs. It also included Rui Rodrigues, investment manager of Tank Stream Ventures, a seed fund for early-stage startups.
Making the pitch
Tank Stream Ventures’ Rodrigues said he has met startups through introductions, cold calls, e-mails and even Twitter. However, he and other panellists said it usually works best to get an introduction.
“Always get an intro—don’t do that cold calling thing,” said Campbell, whose startup GoCatch secured $3 million in their most recent funding round.
Startups should be well prepared when making their pitch to investors, the panellists said.
“You need to clearly explain what you do better than anyone else,” said Rodriques. “That will be your competitive advantage.”
It’s not enough to say no one else is doing the same thing, he said. Investors “know that’s not really true. There are always substitutes or alternatives to what you’re doing.”
The startup founders said it was critical to have most details pinned down, including a valuation estimate, before going to investors in Australia.
“I found that it was really important to always be putting a deal on the table for someone to buy from you,” said Fung from Airtasker. “You have to have pretty much everything nailed, all ready and in place.”
Startups should have thought about the product market fit and get feedback from users before coming to investors, Rodrigues said. It’s also important to have a clear strategy for reaching customers, he said.
“You need to be able to show that you have what it takes to execute on your idea,” he added. “No one finances business plans nowadays.”
Have skin in the game
Campbell said startups should give away between 10 and 35 per cent equity in the company when raising money.
Rodrigues agreed but cautioned startups not to give away too much of the company in the first round, or else they might risk not being as attractive to investors in a second round. “If you have given up 50 or 60 per cent of your company ... no one will want to participate in [the next] round.”
Most investors want to see the startup’s founders have “significant skin in the game, otherwise they won’t have enough incentives to build the company,” he said.
“Start by thinking how much money do you need to raise [and] what’s the valuation of what you’re trying to build,” said Rodrigues. The equity that you will give up will be a consequence of that. If you’re not happy with that you will need to change one of the first two parameters.”
However, Fung said startups should also be overly conservative taking on investor money.
“It’s better to give away a bit more and take on a bit more, because you’re always going to be able to use that money,” he said.
“Generally, capital raising is very time consuming. It’s not like this perfect liquid market where you just tap it and get the money when you need it and when it’s appropriate for you.”
Be persistent and make mistakes
“It’s important to get going,” said Oertli, the founder of Roomz. “Do the deal. Don’t worry too much about maximising the valuation. Worry about getting the deal done and moving to the next milestone.”
“Keep up the momentum,” said Fung. “Whatever you do, you should be moving forward with it.”
“My philosophy has always been a piece of something is better than lots of nothing. You might leave a little on the table, but that’s OK because you need to get to the next step.”
Rodrigues said persistence is critical. “You need to show the tenacity to go after something you really want.”
Each of the startups said they made mistakes along the way but kept going.
“You’ve got to make mistakes,” said Campbell. “You make lots and lots of little mistakes, and that’s good. But you’ve got to kind of get used to that. You do things and you get them wrong and you keep trying and you do them again.”
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