However, getting an investor to fund your business is not easy. In fact, a huge percentage of requests for funding that come their way are rejected for one reason or another. In the eBook “Startup Best Practices: Conversations with Silicon Valley Entrepreneurs”, serial entrepreneur and professor of entrepreneurship and strategy at the University of California (Berkeley) Naeem Zafar shares the secret of getting investors to fund your business.
According to Zafar, if you want your business to attract investors, your business needs to get “traction.” Zafar explains:
Most entrepreneurs think they have a great idea and want to find investors. That is where they go wrong. Each investor is looking for traction and without traction you have very limited funding choices.
Traction comes in many forms so think of it as a pyramid of traction. At the highest level of pyramid you have Purchase Orders, so actual revenue from a buyer in the marketplace buying your product. If you don’t have that, maybe you have some Conditional Purchase Orders that a buyer will buy if you build it. If you don’t have that maybe you have a Memorandum of Understanding that a buyer likes the idea enough to likely buy the product if they’ve got the money available. If you don’t have an MOU you at least have someone that is willing to state that they like the idea. If you don’t have that, you must have a list of people you’ve talked to. If you don’t have that list you certainly have no traction.
The higher you are in the pyramid of traction, the more fundable you are. Don’t approach an investor until you can show some traction.
Essentially, the more you can prove that there is demand and money to be made from your business, the higher the likelihood that you can attract investors.
Zafar also mentions that another critical factor in attracting investors is “finding the right source at the right time… The stage you are in your business and how much money you need also makes a difference.” Who you attract also depends on how much return on investment you can provide them. Take for example venture capitalists. Zafar explains:
“They will not invest time or resources, unless a startup can lead to a potential exit of $100 million or more. Otherwise, the time invested by the senior partners of the VC is not worth it. So you may have a great idea but the achievable exit for the entire company would be $50 million. So in that case you would be wasting time with most VCs.”
If you want to successfully raise funds from investors, you need to understand what these investors need and what they are looking for in a business that they will invest in.
For more advice and lessons for entrepreneurs, download the FREE eGuide Startup Best Practices from 15 Serial Entrepreneurs
For more information, read the following articles:
- What Investors Want Before Funding a Business
- Why Investors Say “No”
- Pros and Cons of Financing a Business