Raising capital is challenging in the best of times, and these aren’t those times. Therefore, you must show up to every investor meeting able to prosecute a compelling case that demonstrates why you represent the best chance for them to make money.
Professional investors in our industry see hundreds of deals each year and make only a few investments. Most of those deals arrive in the same package: a pitch deck, a convertible note or SAFE, stats on TAM, velocity, and projected revenue. That approach isn’t good enough—not in this market.
Let me take you behind the lens of an investor to see what they see when presented with a scenario like the one I outlined above. They see a cool product with a passionate founder. But they also realize what they are being asked. They are being asked to provide money, which you’ll tie up for the next ten years, on the small hope that you are the one out of one hundred that will have the big exit. They also know that the most frequent outcome is a zero.
When you arrive at an investor with this type of investment pitch, you ask them to take a giant leap of faith. If, like most, you are using a convertible note or a SAFE, then certain things need to manifest for the investor to have a chance of a return. The first is that you grow fast enough to be attractive to larger investors and successfully raise a price round. This priced round is required to convert the note or SAFE. Next, that rapid growth needs to continue so that you are acquired. The original investor also needs to hope you don’t require too much additional capital to fund all that growth. Otherwise, they will find their investment significantly diluted.
A few years ago, when money was cheap and M&A activity robust, enough investors were willing to take this leap of faith. That is not the case today. You need to provide them with a different path. You need to become more investable.
How? I am glad you asked. The first step is to ensure you are building a great brand and a good business. This requires focusing on unit economics, sustainable growth, a quick path to profitability, and cash management. The harsh reality is that less money is available early, so you must figure out how to consume less. Put profit before growth and cash before everything.
Your next step is to determine how best to unlock an investor’s money, put it to use, and ensure you can return it to them with an outcome they find exciting. That starts with an investment structure. If you’ve done the above and built a good business supporting a great brand, you can arrive at an investor’s doorstep with a different approach. I am a fan of structured liquidity that carries an opportunity for upside. These investment structures provide a multiple on invested capital (MOIC) of 1.5x to 2.0x. They offer the investor quarterly cash flow, which takes risk off the table and offers a path to participate in potential upside. I won’t spend more time explaining how these work here. You can refer to this article for more information.
The critical point is that you are no longer asking an investor to take a leap of faith. You can demonstrate a good business model capable of putting money to work efficiently. You are offering them a solid return on investment that is not reliant on a future-priced round and an exit. You are providing them with the path to participate in potential upside should you prove to be that one in one hundred that has the big exit. It is a much better investment case than the one you are making.
You must stand out from the crowd, differentiating yourself from the other entrepreneurs vying for the same capital. You need to build a great brand supported by a good business. You must prosecute a compelling investment case and structure the investment, providing a good outcome without reliance on external events. Do these things, and you’ll unlock the money you need to grow andattract more investors.
