Navigating the Investment Landscape: Strategies for Entrepreneurs
Summary
TLDRIn the 'Let's Get Entrepreneurial' podcast, hosts Professor Gary Palin and entrepreneur Ryan Button explore investor strategies for startups. They discuss the importance of understanding different types of investors, such as angel investors and venture capitalists, their expectations, and the value they bring. The episode also covers the significance of due diligence, the art of pitching, and managing investor relationships post-investment. The hosts stress the importance of selecting the right investor over the amount of money, highlighting the concept of 'good money' and 'bad money' in the entrepreneurial journey.
Takeaways
- 🚀 Understanding investor strategies is crucial for entrepreneurs seeking to attract and engage with investors effectively.
- 💡 There are typically two main types of investors for startups: Angel Investors, who invest their own funds, and Venture Capitalists, who manage a pool of investments from others.
- 🔍 Angel Investors prefer early-stage investments, often seek personal connections, and are typically involved in the industry they invest in, which can provide valuable experience and connections.
- 💼 Venture Capitalists look for scalable business models and expect a return on investment within a specific timeframe, often involving significant investments and a detailed governance structure.
- 🔑 Angel groups are a trend where individual investors come together to share resources and make collective investment decisions, offering a more formal approach to angel investing.
- 🏢 Private Equity firms and Strategic investors are less common for startups, focusing on proven revenue streams, detailed growth strategies, and often requiring significant equity stakes and control.
- 📈 Valuation is key in understanding how much equity to offer in exchange for investment, and it's important for entrepreneurs to research or seek guidance to avoid unfavorable deals.
- 📑 A strong business model and a compelling elevator pitch are essential for attracting investors, and these should be well-documented and clearly communicated.
- 🕵️♂️ Due diligence is a two-way street; entrepreneurs should research potential investors as thoroughly as they expect to be researched, ensuring alignment and avoiding wasted efforts.
- 🤝 Leveraging networks for introductions can ease the process of connecting with investors, as trust is a fundamental aspect of investment relationships.
- 📝 Post-investment, managing investor relationships is vital, as it can involve significant preparation and adjustments to meet investor expectations and maintain a healthy partnership.
- ⚠️ There is a concept of 'good money' and 'bad money' in investing; it's more important to consider the source of the investment than just the amount, as the wrong investment can be detrimental to the business.
Q & A
What is the main focus of the 'Let's Get Entrepreneurial' podcast?
-The 'Let's Get Entrepreneurial' podcast focuses on providing insights and strategies for navigating the world of entrepreneurship, including attracting and engaging with investors.
Who are the two hosts of the 'Let's Get Entrepreneurial' podcast?
-The two hosts are Professor Gary Palin and serial entrepreneur Ryan Button.
Why is understanding investor strategy important for entrepreneurs?
-Understanding investor strategy is pivotal for entrepreneurs who need financial investment to ignite their entrepreneurial spirit and transform their ideas into viable businesses.
What are the two basic types of investors typically seen in startups?
-The two basic types of investors typically seen in startups are Angel Investors and Venture Capitalists.
What is the primary difference between Angel Investors and Venture Capitalists?
-Angel Investors invest their own funds and often seek personal connections and high returns with heavy involvement, while Venture Capitalists manage a pool of funds from various investors and focus on scalable business models with a focus on returns within a specific period.
Why do Angel Investors usually prefer to invest in industries they are familiar with?
-Angel Investors prefer industries they are familiar with because their experience and connections in the industry can provide strategic benefits and help make informed investment decisions.
What is the significance of Angel groups in the investment world?
-Angel groups are informal investment funds where multiple Angel Investors come together to share the opportunity to invest in startups, collaborate on investments, and access a wider range of investable ideas.
Why do Venture Capitalists typically require a higher minimum investment compared to Angel Investors?
-Venture Capitalists require a higher minimum investment because they manage larger funds from various investors and seek scalable businesses with a potential for significant returns within a specific timeframe.
What are some key considerations for entrepreneurs when preparing to approach investors?
-Key considerations include understanding company valuation, having a compelling elevator pitch, a robust business model, and conducting due diligence on potential investors to ensure alignment with their investment criteria.
How can entrepreneurs leverage their investors' expertise post-investment?
-Entrepreneurs can leverage their investors' expertise by utilizing their domain knowledge, network, and experience to guide the business strategy and growth, especially if the investors have a significant equity stake or board seat.
What is the importance of managing investor relationships after securing an investment?
-Managing investor relationships is crucial to ensure clarity and satisfaction on both sides, prevent misunderstandings, and maintain a healthy long-term partnership, which is essential for the continued growth and success of the business.
What is the concept of 'good money' and 'bad money' in the context of seeking investment?
-The concept of 'good money' refers to investment from sources that are a good fit for the business and provide value beyond just capital, while 'bad money' comes from investors who may not align with the business's goals and could potentially cause problems or even lead to the business's downfall.
Outlines
🎙️ Introduction to Investor Strategy in Entrepreneurship
The podcast 'Let's Get Entrepreneurial' begins with an introduction to the topic of investor strategy for entrepreneurs. The hosts, Professor Gary Palin and Ryan, discuss the importance of understanding how to attract and engage with investors for those who need financial investment beyond bootstrapping. They outline the two main types of investors typically involved in startups: Angel Investors, who invest their own funds and prefer early-stage ventures with high-return potential and a personal connection, and Venture Capitalists, who manage pooled funds and seek scalable business models with a clear exit strategy. The conversation emphasizes the need for a compelling pitch and a strong business model to secure investment.
💼 Deep Dive into Angel and Venture Capitalist Investment Criteria
This paragraph delves deeper into the characteristics and criteria of Angel Investors and Venture Capitalists. Angel Investors are often wealthy individuals with industry experience who invest in early-stage companies for potential high returns and prefer a hands-on approach. Venture Capitalists, on the other hand, manage larger funds and invest in businesses with significant growth potential, requiring a detailed governance structure and a clear exit strategy. The emergence of Angel groups is also highlighted, where multiple investors collaborate on decisions and share the benefits of pooled resources. The paragraph underscores the importance of understanding the investor's background and expectations before seeking investment.
🤝 Understanding Private Equity and Strategic Investors
The script touches on the roles of Private Equity firms and Strategic investors, although they are less common for startups. Private Equity firms typically invest in more mature companies with proven revenue streams, seeking significant growth and detailed spending strategies. They often require a substantial equity stake and may involve active management, which can be a shift for entrepreneurs used to a more entrepreneurial environment. Strategic investors, often major customers or suppliers, invest for long-term partnership and integration opportunities, requiring a strategic fit and alignment with their core business.
📈 Preparation and Post-Investment Strategies for Entrepreneurs
The final paragraph focuses on the importance of preparation for investors, including understanding valuation, having a compelling elevator pitch, and conducting thorough due diligence on potential investors. It also discusses the importance of managing investor relationships post-investment, emphasizing clarity and communication to ensure both parties are satisfied. The paragraph concludes with advice on leveraging investor expertise and a cautionary note on the importance of choosing the right type of investor, as the source of funding can be as critical as the amount invested.
Mindmap
Keywords
💡Entrepreneurship
💡Investor Strategy
💡Angel Investors
💡Venture Capitalists
💡Bootstrapping
💡Private Equity Firms
💡Strategic Investors
💡Valuation
💡Due Diligence
💡Elevator Pitch
💡Investor Relations
Highlights
Understanding investor strategies is pivotal for entrepreneurs seeking to attract and engage with investors.
Bootstrapping may not be viable for all; financial investment might be necessary for some startups.
Angel Investors are private investors who typically invest their own funds and prefer early-stage investments.
Venture capitalists manage a pool of funds and seek scalable business models with a focus on high returns within a specific timeframe.
Strategic investors, often major companies, may invest in startups for pre-acquisition deals or strategic partnerships.
Angel Investors usually have industry experience and can provide valuable connections and strategic input.
Investment criteria for Angel Investors often include early-stage potential and a significant equity stake.
Venture capitalists may replace the founding team with more experienced individuals for better operational management.
Private Equity firms and strategic investors are less common for startups and prefer proven revenue streams and growth potential.
Investors expect a clear exit strategy and detailed governance structures in their investment terms.
Networking and building relationships are crucial for gaining introductions and building trust with investors.
Due diligence is essential for both entrepreneurs and investors to ensure a good fit and avoid potential issues.
A compelling elevator pitch and a robust business model are essential for attracting investors.
Legal representation is important during negotiations to protect the entrepreneur's interests.
Managing investor relationships post-investment is crucial for maintaining trust and clarity.
Leveraging investor expertise can provide significant advantages in business growth and industry navigation.
It's vital to differentiate between 'good money' and 'bad money' when seeking investment, as the source can impact the business's success.
Transcripts
[Music]
welcome to the let's get entrepreneurial
podcast your go-to resource for
navigating the world of Entrepreneurship
in today's episode we delve into the
world of investor strategy in
entrepreneurship whether you're just
starting out or looking to expand
understanding how to effectively attract
and engage with investors is pivotal if
you're looking to ignite your
entrepreneurial spirit and transform
your ideas into
we invite you to follow our
podcast the let's get entrepreneurial
podcast is your ultimate Launchpad for
igniting ideas and skyrocketing your
entrepreneurial dreams tune in buckle up
and let's unleash the entrepreneurial
Spirit within your Two Hosts will be
Professor Gary Palin and serial
entrepreneur Ryan
button hello Ryan how are you doing I'm
doing brilliantly what about you
Professor Palin do doing very well I
understand you've got a busy day in
front of you I certainly do uh big
on-site with the client that we're
introducing to the development team so
it's exciting days over here all right
well let's do this episode and we'll let
you get back to the real world there we
go today we wanted to talk about
investor strategy now we've covered
investor components in different angles
but this is specifically truly
understanding the investors and the
strategies with approaching them and
negotiating Etc
it's good to dive more deeply into this
topic as you said we've approached it in
a couple different ways through
different podcasts we'll take this
opportunity to really flesh it out for
people assuming that bootstrapping is
not a viable component for you that you
need financing and I would recommend
anyone that hasn't listened to our
bootstrap episode to go back and review
that to see if you really need
investment but let's assume you've done
that and you need financial investment
for whatever reason there's two basic
types of in investors you will typically
be using and then there's two that
typically we don't see startups if ever
using them as more developed Ventures
but we'll touch on those also so the two
that typically you see are Angel
Investors which are private investors
they're investing basically their own
funds and venture capitalist which they
pull together a venture capital pool the
other two are private Equity firms and
strategic investors we'll touch on those
strategic investors for someone who's
not familiar with it is very often a
major company will invest in a startup
usually it's a pre-acquisition type of
deal with Angel Investors probably the
most common their expectations are they
like to have a personal connection
there's very often a passion they like
to see because it's an early investment
typically they like to see the potential
for high returns and they like a heavy
involvement in the
Venture this is a wealthy individual
that really wants to deploy their
capital in a creative way and they're
typically the ones that lead into this I
would say another typical thing of these
Angel Investors is experience in the
industry so if you're in healthcare
these people are typically retired
Healthcare Executives if you in the
music industry they've typically had a
career in music I don't often see and
I'm not saying it never happens people
investing in industries that they don't
have a very close familiarity with
Warren Buffett one of his major theories
in Investments he never invest in a
company that he doesn't
understand that's a pretty good one
someone that has experien not just the
experience but the connections in the
industry are a major benefit that's one
of the things I look for it's not a
absolute requirement but definitely it's
icing on the cake a lot of times they
can be a very strategic investor right
they can bring you into a lot of rooms
through their experience in that
industry or make connections for you the
investment criteria for Angel Investors
usually it's early stage potential
so they are the one of the first if not
the first to get in external outside of
your family friends and fools and with
that because it's a higher risk you're
usually giving a serious Equity stake
with those Angel Investors and the terms
can vary widely it's very
negotiable the terms can be huge and not
only are you giving them an equity stake
as you put it earlier typically their
involvement maybe not day-to-day but
definitely week to week is a lot higher
than other
investors Angel Investors usually
usually their investment is lower than
the barriers for venture capitalist you
might get an angel investor of 25,000
50,000 you'll see them on the high end
but typically you're not seeing them in
the million two million though it can
happen it definitely can happen but
you're right that's a rarity they're
coming in with that first money to get
viability for the company if you need
quite a serious infusion of capital and
you set your minimum too low say at 25k
be careful of not having 10 15 20 Angel
Investors because your full-time job
would be managing the angel investors
you definitely don't want to get stuck
in that
position with Venture capitalists they
will typically have a much higher dollar
amount lower threshold used to be
typically around a million but it can
creep up to two million and up it's not
their money what they've done is they've
accumulated a venture fund from either
wealthy investors or institutional
investors their job is to invest that
and provide a return to those that
invested in their fund they have a
responsibility to someone else or an
angel investor it's their money I'll
I'll add another caveat to the angel
investor group before we totally move on
and that's the Advent of Angel groups
I'm seeing this a lot more in the
investment world where instead of
dealing with one single angel investor
so an individual again investing their
own money a lot of these people are
coming together so that they can get a
higher access to investable ideas or in
investable companies and they're calling
themselves Angel groups it's a informal
investment fund if you will where they
get to hear pitches hear the ideas and
make investment decisions together and
often collaborate on those
Investments with the Venture capitalists
they very much want scalable business
models they don't want incremental
growth they're looking for a return on
their investment within a specific
period of time because again they're
answering to other people that have
invested in the fund and the patience
tends not to be as long
and their reporting is high they have to
prove a track record it's not investing
your own Capital you're hoping for a
return on the schedule of course but
they actually are responsible for kpis
how much did they invest what was the
return and what is the exact timeline
that that took place over and they also
would like to see an experienced
management team in the companies that
they're investing in and if you're a
nent entrepreneur looking at venture
capitalist you're the CEO or president
of the company
you ultimately may get replaced by
someone with more experience from their
group of people they've dealt with over
years I've never dealt with that
personally but you do hear and see that
happen quite often where the founding
team will get phased out and a more
mature team will get put in somebody
that's done that type of operation over
and over again but that's usually good
news because that means you're very very
successful and you still have equity in
the company so you're bringing more
experience people and the theory of
would you rather have a large piece of a
small pie or a small piece of a very
large pie that's the the theory behind
that so it's good news if you get
replaced and there are plenty of stories
out there of your job role changing for
the better instead of being the person
on the shopping block the CEO you're
often moved into the head Visionary role
or a role where your long-term vision
for the company is now your focus and
the day-to-day operations get handed to
somebody that's done it before and also
with venture capitalist they wanton a
very serious exit strategy Where Angels
like exit strategies but it's not as
hyperfocused as with VCS they want to
know when they're getting their money
back yes on an exact timeline often
their investment criteria are the growth
potential they make significant
Investments and there's usually a very
detailed governance structure in their
terms and often times they are available
for further Investments as well so
there's somebody to keep in mind that
this is going to be a longterm
relationship quite often and not a
shortterm burn Insurance
strategy the other two private Equity
firms and strategic investors we'll just
touch on them quickly because it's not
very applicable to most of our audience
from my gathering of our interactions
private Equity firms they're almost
acting like a very sophisticated
investment backer and oftentimes they do
fulfill that role for the fund they are
the investment banker per se for the
fund that they're representing yeah and
then not going to get involved in
startups they want to see proven revenue
streams they want to see potential for
improvement so you should have a very
serious track record of growth but you
also want to show them how that's going
to keep that trajectory growing forward
not to move flat they tend to look in
the longer investment
Horizon they also want a much more
detailed and this is not the other
investors don't but a much more detailed
how this money is going to get spent
strategy upgrading a piece of equipment
that has a very definite purpose or
increasing a sales team by this exact
number of people and maybe even the
salary ranges they're going to go into I
also understand that very often you're
going to give a very significant Equity
stake when you're going to a private
Equity Firm this is not in small single
digit
percentages yes often times as well as
some control of the company whether that
actual Equity State comes along with it
or whether it's a board seat something
along those ones there's definitely
active management and at that time a lot
of entrepreneurs are uncomfortable
because you're moving from more an
entrepreneurial EV venture to more ofel
corporate structure you probably are
that's a good way of putting it a lot of
entrepreneurs that are uncomfortable
with that and they would like to exit at
that point which is fine because you
still own your Equity so you're getting
your return at that point
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today now let's dive back into our
journey of entrepreneurial
insights strategic investors are
somewhat rare but if you have say a
major customer that's utilizing your
firms very often they will invest in
your company to help with the growth
there has to be a strategic fit it's
usually a long-term partner ship and
it's integration
opportunities that is typically where I
see it is it's vertical integration so
it's somebody that you're supplying
getting supplies from that you're really
closely tied into and they see the
opportunity so this is typically brought
up organically in the course of business
and a lot less going out and seeking
these opportunities and there definitely
has to be an alignment with the core
business with the Strategic investor and
the company they're investing in without
a doubt you're going to be not only
investing in that company But continuing
to work with them on a daily or weekly
or monthly basis preparing for an
investment is something I wanted to talk
about you have to understand valuation
if you're not familiar with valuation of
companies I would do a deep dive in
research understanding valuations and or
bring in someone with experience that
can help guide you through the valuation
if it's the first time
around understanding that is a good way
to not get rip off not saying that
anybody's out there to rip you off but
just having an understanding is a great
litness test for what a good deal is an
okay deal isn't a great dealers there's
so many nuances on that if you're a
newbie if you will those nuances can go
right over your head that could be
disaster down the road also you want to
be very cognizant of having a very
compelling elevator pitch when you're
preparing for the investors and you want
to have a very robust strong business
model with without a doubt and to be
able to show that business model so it
documented somewhere not only in your
head where you know how the systems and
processes work but actually written down
and can be communicated very clearly
very often the pitch deck is sent to the
investors before you ever get a chance
to meet with them that's the opening
line that's the digital elevator pitch
because I've know we've done an episode
on elevator
pitches approaching investors you have
to understand the due diligence process
so understand they're going to be doing
due diligence on you but you should do
it on them do a deep dive into who these
people are that you're approaching
before you approach them you want to
make sure you're targeting the correct
investors for example if there's a
venture firm that doesn't touch early
stage Ventures well you're wasting your
time connecting with them is they are
not going to invest in you do research
on them on what type of Investments some
just do technology some deal in just in
healthcare understand what their history
is I see that as a huge one actually
because quite often there are many
Gatekeepers if you will before you
actually get to talk to somebody that
can make a decision on investing or not
investing and those Gatekeepers don't
typically answer really any questions
doing your due diligence on just as you
said this is a healthc care investor I'm
not in the healthcare industry this is
not a worthwhile conversation is really
on you I can't tell you how many
startups I've dealt with that have
wasted quite a lot of time and effort to
get to that first conversation and it's
like slamming the brakes of the car
they're really excited the energy is out
they feel like they're pitching and the
second their business structure gets
laid out it's oh I'm sorry we don't
invest in your industry exactly we have
spoken quite a bit about networking and
building relationships as you're
developing your business this is where
there really is a payoff where cold
calling is not impossible with investors
it's much more difficult or I say it's
an easier path if you have your network
that can give you an introduction it's
all about trust nobody's going to give
you an investment if you haven't built
that trust up and being referred is a
very easy way to come in with a little
bit of trust already built yes and it's
securing the deal you want to have
developed your negotiation tactics and
or bring someone in that has experience
with this because there is a lot of
landmines that can be laid out that
you're not even where you're stepping
into that's exactly right I've actually
had the privilege of doing that for
multiple startups as well when they get
to that point coming in and helping
present their technology in a way that
can be easily understood by the investor
so that we can create Clarity on that
with securing the deal whether you
understand that or not I would say make
sure you have legal representation
someone that has tremendous amount of
experience in dealing with the
legalities of these structures and have
your own representation don't use the
Venture capital's legal repres
presentation right the post investment
strategies I want to touch very quickly
is managing investor
relationships I had a former student
that I was speaking with he was telling
me that was the most difficult part his
thought was he had the quarterly
meetings with the investors ahead board
seats and he said he spent a month
preparing for the meeting and then a
month recovering from the meeting trying
to implement what they asked him to do
and he said he had very little time to
actually run the business because of of
this so you want to get very clear on
what the managing relationships are it's
not something you want just to take for
granted right and that goes two ways you
might be the one that's having to do
this stressful month before and
stressful month after because of
implementation and expectations but you
want to make sure that that investor is
happy as well so that they're not the
one feeling like they don't know what's
going on or you're bombarding them with
information Clarity is key in that
process an unhappy investor is not a
good thing no it's not especially if
you're continuing to grow yes and if
they have a very large Equity position
you have a problem that's right the flip
side of that though is with post
investment strategies if you've
identified your investors properly that
have domain expertise leverage that
investor expertise don't be afraid to
use that because that's one of the big
assets that they bring to the table so
utilize that after the fact after the de
is done often times that's the reason
that you should be picking your
investors is because they have that
expertise and you're able to leverage
their years of experience or their
Network or their expertise in what
you're doing that should be a serious
criteria you're considering before you
get to the point where you're thinking
about can you leverage it or not are
there any final thoughts you have before
we wrap up regarding investor strategies
I have one very clear final thought and
and I say this from a point of view
where I didn't take this seriously early
on in my career and I not that I regret
it but it definitely made a difficult
time for me and that is when you're in
the place that you're seeking money it
seems like there's no money out there
and that you need to grasp at whatever
is available and I will tell you from
experience that there is plenty of money
out there and it is far more important
where it comes from than how much comes
in it's more important who gives it to
you than how much they're giving yeah I
recall when you were in college having
this conversation with you and I defined
it as there is good money and there is
bad money that is a concept that's very
foreign to people but bad money is
coming from someone that is not a good
investor they're going to be very
problematic and it could be the demise
of your business if you take money from
the wrong person or people without a
doubt please keep that in mind if you're
listening to this on that note let's get
entrepreneurial
let's get
entrepreneurial as we wrap up another
episode of the let's get entrepreneurial
podcast we extend our gratitude for your
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[Music]
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