- Entrepreneurs should raise money by approaching investors to build relationships.
- People who know your product are the most likely to invest, so start within your network and expand.
- You should also develop an online presence on Twitter or Clubhouse to get in the mix with VCs.
- See more stories on Insider’s business page.
If you’re a new founder hoping to raise funding for your startup, it’s crucial to cultivate a network of prospective investors without starting out by asking for favors.
Case in point: Investor Namrata Banerjee has been getting dozens of strangers messaging her every week on social media since the pandemic started.
Usually, they’re asking for money or pitching their startup ideas, Banerjee, director of the VentureBridge program at Carnegie Mellon and a venture partner at the fundraising platform Republic, told Insider.
She said the slim chance a cold call like that might work increases if the entrepreneur doesn’t start by asking for money. Instead, it should be all about relationship building.
“Asking for money and trying to connect are different things in my mind,” Banerjee said. “Most of the requests I get are over the 200-word character limit,” she added. “I just don’t have the time to sift through those.”
Melissa Barash, founding partner at Left Tackle Capital, agreed it’s better to approach investors with questions rather than cold pitches.
“Ask for advice instead of money,” she said. “It helps you understand what the investors care about, the types of opportunities they like to invest in, and when.”
Here’s what else investors and founders suggested doing to raise that crucial first round.
Tap your existing networks first
It might be helpful to make a list of networks you’ve already participated in, like university alumni associations or student groups. It doesn’t have to be a formal network, but simply a list of people you know.
Such was the case with Siqi Mou, cofounder of HelloAva, who said the first amount of funding an entrepreneur attracts is generally an investment in a person or a team, not a specific business strategy.
“It’s important to find people who know you, as the founders, and who trust your vision,” she told Insider. “Most businesses will pivot and will change. It’s rare to get the right product-market fit on the first try.”
Her beauty ecommerce platform, founded in 2017 and offering personalized skincare consulting and product recommendations, now has roughly 70,000 newsletter subscribers and raised around $2 million in funding.
She met her first investors as a student at Stanford University and, years later, simply asked them for a meeting to present an idea before she had a full business plan or any users. She used feedback from those former classmates to iterate on the idea and launch a company. They invested in her startup, she said, based on trust established during their collegiate days.
Cyo Nystrom, CEO of the sexual wellness brand Quim, said she met her first investors through her lawyer and pitching competitions.
“We started this business with about $12,000 of our own savings and that lasted us until we got our first check in 2018,” Nystrom said.
Connect with investors who already care about your target audience
Once you’ve already tapped your existing network, the next step is looking for introductions to investors from your target audience.
Suma Wealth CEO Beatriz Acevedo said most of the investors in her Latinx-centric fintech startup are Latinas living in the United States. One of her first investors was someone she already knew through a local community organization in Los Angeles. Then she asked for introductions.
“What helped me was, with the investors, I didn’t have to explain to them why this market matters. They’ve lived this. The numbers made sense to them,” Acevedo said. “Serving your community is valuable. If people don’t see that, you don’t want them on your captable.”
Acevedo added that the most important part of raising is keeping in touch with capital allocators.
“I take investor meetings every single day, although my round closed,” Acevedo said. “We want to get to know each other, even when I’m not raising.”
Banerjee said entrepreneurs should develop an audience on a platform like Twitter or Clubhouse, where venture capitalists generally go for news and social networking.
“It’s like developing in public. I can read about the progress of the product or company they’re making,” Banerjee said. “There are platforms like Kickstarter that might be better for hardware products, like a watch or an ergonomic keyboard, in order to get the initial crowd interested and to get feedback on the product.”
Barash agreed, adding that consistent progress can help build trust with investors.
“One of the things that people have seen a lot of success with is keeping investors updated regularly with milestones that they’ve reached,” Barash said. “Communicating how you’re progressing will help initiate those conversations when the timing is right.”
Plus, Nystrom said, leveraging social media can be a great way to grow the startup’s audience and prove to investors there is lucrative demand for your product or idea.
“We went to reaching out to (brick-and-mortar) shops to running our own Instagram,” Nystrom said, describing how she spread the word about her company. “Then setting up affiliate programs and subscriptions on our website.”
Consider starting with loans or crowdfunding
For anyone looking to bootstrap their startup rather than go straight to investor networks, Tai Adaya, CEO of skincare brand Habit, said entrepreneurs can get creative with their money management.
“Right now the economy is bad, so there’s a lot of cheap interest loans,” Adaya said. “Make sure you understand the landscape before you dive into anything. Look at different loans and grants the government is offering.” Even just raising a few thousand dollars this way and establishing the new brand can make the project more attractive to investors who are still getting to know you.
Barash also advised aspiring fund managers and entrepreneurs to “do a mix of everything” when it comes to fundraising and building a “tribe” of supporters.
“Know what is the intention or purpose behind it,” Barash said about raising external capital. “There are so many businesses where outside capital may not be the answer.”
Whether it’s favorable distribution contracts for physical products, like Adaya secured for her wellness products line, or crowdfunding from customers, there are many ways for entrepreneurs to get initial funding outside investors.
“I bootstrapped before I raised, until I raised $100,000,” Adaya said. “During the pandemic, it’s been a little bit more focused on business fundamentals and a little less about relationship building, which can be an advantage.”
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