“Your idea is shit, but I like you.” Rocket Internet CEO Oliver Samwer spoke these words to Johanness Schaback, founder of Ladenzeile, as he asked for investment. The takeaway? Investors do not invest money into ideas, but into talented people and strong teams.
This is the same position founder and investor Nicolaj Højer Nielsen takes in his new book, Startup Funding. The Danish entrepreneur’s book was written with founders in mind and provides step by step guidelines to securing outside capital.
Here are five takeaways:
Do not present your idea too early
Ideas themselves hold little value to investors. Most are concerned with what happens after a founder has an idea and how they plan on moving forward. For banks and investors, an idea is a risk. This is why when looking for funding Nielsen recommends starting slow. Young startups should not reach for the stars immediately and instead start with friend-and-family rounds.
Know what you need
Nielsen mentions various funding needs: Some companies will not require any capital, while others need a lot of money to finance research, marketing or to continue development. Knowing how much is needed allows you to present a specific target and easily approach investors.
Know what makes investors tick
No startup is the same and they always differ regarding their risk profile. Multiple factors influence a startup’s risk, like the market, the business model and the team.
Some startups have low risk, but seem likely to yield low returns, whereas others are high risk and promise high reward. Generally speaking, business angels look for high risk, high reward opportunities. Banks, on the other hand, want to avoid risk. Instead of selling your startup as the next Facebook, Nielsen recommends only taking enough financial support needed to reach the next milestone – then using this success to catch the eye of additional investors.
Consider whether you really need money
The money does not come for free and investors will want to take a share of the startup. A founder can quickly go from owing 100 per cent of the shares to 17 per cent. Of course, each founder needs to determine what approach is best for them by deciding how important it is to keep control of the company. Nielsen advises founders ask themselves: Do we really need the money now? What can we achieve without investment?
Get yourself a good co-founder
From an investor’s point of few, a team of founders that compliments one another reduces risk. Outsourced processes tend to frighten investors, whereas having a capable team with relevant and varied skill sets helps alleviate concerns. When searching for a suitable co-founder ask yourself if you could imagine drinking a beer with her or him, Nielsen suggests. “You are going on a five- or ten-year journey, and will spend more time with each other than you do your spouses,” the author said. “You need to find someone who shares your vision.”
The entire book is available for download here. You can read the first 100 pages for free.