Seeking Investment: 5 Critical Lessons

When considering investment for your startup, envision that money as fuel that lifts you to higher levels like an elevator. Each new floor represents a growth opportunity, often requiring fresh capital. Even founders who have successfully navigated the world of investment have cautionary tales about the timing and consequences of their decisions to seek funding.

In my entrepreneurial journey, I was once advised to study a book about complex investment instruments and mathematical formulas that were catching founders off guard. What I really needed at that time, though, were the fundamentals. So, let's start with the basics of strategic investment seeking. How can you plan for and navigate the need to inject outside funding into your business?

Here are five key lessons from experienced entrepreneurs to shape your investment mindset:

1. Prioritize Customer Growth Over Investor Pursuit

It's tempting to dedicate significant time to pitching investors, but this can distract from proving your product's market value. While you might think you can juggle both, it's rarely effective. A robust customer base makes you far more attractive to investors and helps safeguard your financial interests.

2. Know Your Sector and Target "Smart Money"

Investors specialize in different areas because each industry has unique investment dynamics. For instance, telecom, energy, pharma, manufacturing, and aerospace startups often require substantial upfront capital to navigate high material costs and lengthy regulatory processes. In contrast, SaaS businesses are popular among investors due to their relatively low entry costs and scalable digital growth.

However, even within SaaS, niches exist, and riches are in the niches! Seek "Smart Money" – investors who not only provide capital but also bring industry expertise, customer access, and valuable connections. These investors understand your sector and can contribute to long-term mutual success. To attract smart investors, you usually need to have market traction.

3. Maximize Organic Growth

If possible, demonstrate growth without venture capital for as long as you can. This strategy often leads to a more substantial personal payout upon exit. Consider this real-world example: Two SaaS founders started around the same time. One immediately secured millions in funding for aggressive marketing, while the other grew organically with just $100,000 from friends and family. When their companies eventually merged, the former walked away with $40,000, while the latter pocketed over $10 million.

4. Strategically Plan Investment Stages

Avoid seeking investment merely to cover debts or follow trends. Instead, align your funding rounds with specific growth milestones. Map out your business expansion strategy, identifying key points where investment can fuel your next leap. Whether it's entering new markets, outmaneuvering competitors, or scaling operations, each funding round should have a clear purpose and expected outcome.

5. Understand Investors and Consider Angel Investment

Investors fall into these three categories:

Angel Investors are typically wealthy individuals who invest their own money in early-stage startups, often providing smaller amounts of capital ($25,000 to $500,000) along with mentorship and connections.

Venture Capital (VC) firms manage pools of money from multiple investors referred to as LPs, Limited Partners, who focus on high-growth potential startups, usually investing larger amounts ($1 million to $100+ million) in exchange for equity, often across the following funding rounds:

1. Series A: Usually the first significant round of venture capital financing.
2. Series B: Focuses on scaling the business after achieving certain milestones.
3. Series C: Often aims at rapid expansion, entering new markets, or preparing for an exit.

Private Equity (PE) firms invest in more mature, established companies that are already profitable or have very clear paths to profitability, often buying controlling stakes or entire businesses. They typically aim to improve operations and profitability before selling the company or taking it public, dealing with much larger sums than angel investors or VCs.

While many tech founders famously succeeded at attracting venture capital in the past few decades, it's less plentiful for companies in their early stages. With increased pressure on VCs, they're less likely to back risky,? early-stage startups. Angel investors are filling this gap, often taking risks on promising new ventures. It's becoming common for founders to consolidate multiple angel investors for substantial seed funding. This approach can secure "inexpensive money," allowing you to scale and potentially negotiate better terms in subsequent Series A and B rounds with VCs . To learn more about angel investors, check out the? Ark Angel Alliance website (www.arkangelalliance.org ) and follow the steps to make your pitch. As a board member for a few years now, I’ve seen the caliber of companies pitching for angel investment climb.

Do you know a company founder?? Please, share!

About Soul Food for Founders

There are a lot of resources, books and advisors to help entrepreneurs, and Marla Johnson accessed many of them over her 30-year career as a founder of video production, ISP & web design, digital marketing, game development, blockchain, and fintech SaaS companies. Soul Food for Founders is Marla’s attempt to wrap up her learned experiences, successes, and failures into meaningful and satisfying insights to lift up creative founders, so they are inspired, centered and can power on. In some cases, these are learnings that would have changed everything if she could have understood them earlier.

Marla brings her whole self to each delicious day and is passionate about doing, making, fixing, founding, and innovating. She loves her family, friends, neighbors, music, art, words, nature, gardening, and biking.? She uncontrollably jives and sings when any of a variety of tunes come on.?

Canem Arkan Melissa Kempkes Alese Johnston James Hendren Jeff Amerine, PMP Jeff D. Standridge, Ed.D. David Sanders Ben France John Nabholz Matt Waller Will Bunker Mimi San Pedro Tracy Black Clete Brewer Sarah Goforth David Hinton, MBA, PhD, RTTP Alan Ellstrand Nitin Agarwal Stephen Addison Karl Schubert Nigel Prince John Chamberlin John Harrison Collins Andrews Courtney Pledger Courtney Little Wayne Miller Joe Ehrhardt Uday Akkaraju Dave H. Daniel Schutte Hamza Qadir Charles Potts Tina Giorgio Earnest Sweat Cedric L. Stone Laura Fine Jake Fuchs Sterling Smith Susan Bristow Chrissy Cook Victoria (Tori) Scott Jennifer Fowler Jay Harrod Cal Kellogg Arthur Ordu?a Teresa Osam Elizabeth Small Kimberly Smith Lee Watson Cory S. Anderson Steffany Benton David Brooks, CFA James E. (Jim) Cargill III Jennifer B. Carlisle, JD Jordan Carlisle Kathryn Carlisle Jeannette Collins Ray Dillon Sarah Beth Estes John Haley Sarah Heer Amy Hopper Swan Rebecca Hurst Trevor Lain Barbara Marchini-Ellis Eric McDaniel P. Tate Olinghouse Pamela Reed Liz Russell Sherman Tate Mallory Van Dover Randy Zook Jay Chesshir Phillip Weinstein Philip Tappan Eric Aulicino Andrew Herden