Don't start asking investors for money until you have a full sense of what your business is and how much it will take to get it off the ground.
So, the light bulb just went off and you've got a brilliant idea. You do a little research and have a really strong feeling about this idea. You're excited about this project. The problem is that you don't have all the money you need to make it a reality. Which is why you need to ask someone to write you a check.
But before you start pleading for money, make sure that you answer the three following questions.
1. What's My Niche?
Here's what it all starts. Prior to pitching an idea for a startup, you need to know what exactly you're selling and to whom. This means that you have to prove to investors that there's an actual interest in your product with cold, hard facts. Is there a need for your product? Who are your customers? How can you reach them? Who are your potential competitors?
Besides backing up your startup with stats, you'll need to provide real-word examples. And one of the best techniques for discovering real-world examples would be through "bottom-up" analysis. Inc.com columnist Jeff Haden describes this analysis as being "calculated by estimating potential sales in order to determine a total sales figure. A bottom-up analysis evaluates where products can be sold, the sales of comparable products, and the slice of current sales you can carve out. While it takes a lot more effort, the result is usually much more accurate."
To conduct this type of analysis you can either be an expert, or just notice that's a problem that needs to be resolved. So let's say that you develop a new wine bottle opener because you either worked at a winery or overheard people discuss the need for an easier way to open up a bottle of vino. From there, you would take a look at many bottles of wine are sold and how many wineries are there in your area--if you lived in Maine as opposed to California that would be a problem--and across the country. From there, find out how many wineries would sell your opener and how many openers are typically sold per year. If you do the math, you should have a better idea of whether or you can fit in your niche.
2. How Much Money Do I Need?
This is another extremely important question, since it will determine several factors about how and where to pitch your startup. For starters, have you begun operations? If not, then you'll need to know how much capital you need to get this whole thing started. If you're already begun operations, then you need to know how much it will take to get you to the next phase of your startup.
Also being aware of how much money you need could guide you in where to ask for an investment. For example, you might be able to raise a couple of thousand dollars by asking friends or family members or taking out a loan. If you need more than that you may have to consider reaching out to the following individuals or agencies:
- Incubators--Focus on growing a startup in the early stages and give you access to mentors and resources, for a fee.
- Accelerators--Focus more on the idea phase and offer a little bit of seed money to pitch the startup to venture capitalists.
- Angel Investors--Wealthy individuals who can provide seed money or help the startup during times of trouble.
- Venture Capitalists--Firms that invest other people's money into your startup--some even operate within a niche.
Once you figure how much money you need, you'll know where to ask for that money, since you can find investors at varying stages during your startup. Also, it will give you a better understanding of how to ask since each type of investor has a different mandate.
Finally, if you know how much it will take to get started, you're making sure that you won't have too much or too little funding. Both can sink a startup.
3. Can I Describe My Startup in One Sentence?
Remember: A great idea is a simple idea. Can you easily and quickly describe your startup to others in one sentence? Will they will be able to understand your idea? That's the reason why people make such a big deal about the good, old elevator pitch.
If you can't provide a short summary, and in simple terms, then how do you expect investors to understand what you're pitching? If that's an issue, then you might have to go back to the drawing board.
