Gorilla Capital’s Sampo Parkkinen gives an investor’s-eye view of how startups and scaleups can become an unmissable opportunity.
An entrepreneur needs two things to be successful. One is a solution to a problem. The other is cold hard cash.
The first shouldn’t be too difficult if the entrepreneur is an entrepreneur. They will be focused on an issue that’s causing tangible and significant loss or irritation. They’ll have a plan for how to rectify that issue and be working towards establishing a workable product or service.
The second is tougher. Unless they are already wealthy they will need to involve others to build up their cash reserves to make their solution become a reality. It takes skill to convince others that you are worth them risking their money. Your character, skills and abilities will come under scrutiny in a pressurised situation where your dream is on the line.
I’m both a serial tech entrepreneur and, through the Gorilla Capital fund I part-own, an investor. I’ve been on both sides of the Dragon’s Den studio, so to speak, and I’d like to share my thoughts on how an entrepreneur and their business can give themselves the best possible advice on how to get investment. I’ll look at all aspects of the funding round, from how you should approach investors to what you need to prove to them and how much you should be asking for.
First up, a little about myself. I sold my first startup, RapidBlue Solutions, to ShopperTrak in 2013. I actually worked for ShopperTrak in Chicago for some time after that but realised how much I craved the entrepreneur’s life. I founded my second startup, Revieve, a digital beauty advisor service, last year, and also formed the Gorilla Capital fund with my colleagues, Risto Rautakorpi and Petri Lehmuskoski.
So, that’s me. Let’s look at how to get investment for your fledgling business…
1 It’s NOT about the product
Do you understand the customer? That’s the No.1 question I have in my mind when a business is presented to me. It’s so important I’ll ask it again in even more specific terms: Do you deeply understand the customer?
As I mentioned earlier, I am attracted to those who have identified a significant problem. They are focussed on providing a solution to customers, who might be other businesses or consumers. They want to create a product or service that solves that problem.
If someone comes to me with a product and is completely intransigent about that product I would doubt their potential. It is the customer and the problem that is the focus, NOT the product. The entrepreneur must be flexible and the product can and should be changed depending on new information.
2 Is it worth it?
So you’ve identified a problem, but is it a problem worth solving? Are you saving a multinational €1,000 a year? Are you saving hundreds of small businesses hundreds of thousands a year? It’s amazing how many startups haven’t really considered that while their solution is neat, it’s pretty much valueless.
If you want my money, you need to convince me that customers can be convinced to buy the product or service. Consumers and businesses are interested in paying for things that serve a purpose, but they don’t have unlimited funds to solve issues. For example, even large companies might only concentrate on developing four or five ideas per year to improve operations and efficiency. Is the problem you have solved important enough to make this top five?
If you want my money, you need to convince me that customers can be convinced to buy the product or service. Click To Tweet
By the time you reach an investor you should have evidence that there is genuine interest in your idea. Ideally, you’ll be able to show that you’ve made the top five list on a company’s list of problems to solve. An LOI is good, but a purchase order and contract would be even better! A story about interest without commitment should be counted as a rejection.
3 Be yourself…
Let’s say that you’ve convinced me that you are customer-focussed and that you have found a problem that’s significant enough to warrant solving. I’m really interested in this idea, but now I’m looking at you.
Being under the spotlight can be unpleasant experience. Many people, particularly if they are new to this game, can feel embarrassed about asking a virtual stranger for cash. It can be uncomfortable to feel judged and to know that our dreams are in the hands of others. Being yourself under this pressure is an important part of how to get investment.
Ideally you should be yourself and be the way that presents your business best. You’ll start to relax and feel comfortable when you take down the pretence and allow the person that created this great idea to come to the forefront.
Personally, I don’t want to see a specific pitch deck. It’s a barrier that cuts out everything that makes you a startup and takes the character out of the company. Present the company how you feel it should be and focus on the things you believe to be important.
…and be open and honest
We don’t want you to sugar-coat things. If there’s a problem or anything negative that you want to hide, you’re wasting your time asking for investment. Maybe you’ll calculate some strange cumulative figure to obfuscate a poor trading year and get beyond stage one with the investor.
Don’t celebrate for too long − due diligence will uncover everything and the investor’s trust will disappear. Like with Nixon and Watergate, it’s not the original crime, but the cover-up. All businesses can experience a bad year, for example, and there may well be a good explanation for it.
Maybe you tried to scale too fast and it didn’t quite work out. You know what − if that happened and you took decisive action to re-establish the business, you’d go way up in my estimation. I’d have faith in you personally, for being honest, and professionally, because you were able to make a great business decision.
4 Don’t get carried away
This is absolutely essential − raise as little money as possible. The cash you raise should open doors not imprison you. The amount and the terms should give you greater options, not make you inflexible and fearful.
We investors all dream of a unicorn investment, however no one can ever be certain that a startup will be a success. There are just too many variables. Maybe a new law will cause the business to fail and everyone will lose their money. Maybe the business will double in value in three years, maybe it will grow from a $10m company to a $100m enterprise in the same amount of time.
No one can be certain. By over-capitalising at an early stage the entrepreneur’s choices become limited. Bring in $10m and all of a sudden you have to bear that figure in mind should you want to sell in a couple of years’ time. Everyone will want a big slice of that potential sale price. Even if your business has grown substantially it might still be a burden. Similarly, that initial capital figure will also set expectations for the next funding round.
5 Be realistic about your valuation
Following on from the above point, it’s in your interest to be realistic about the valuation of your company. We’ve all seen those cringeworthy moments on Dragon’s Den when a pitcher tells the investors that his cake business that’s sold 20 units is worth $25m. His credibility is shot in a minute.
It can be in your favour to aim much lower. Only 20% of M&A deals are worth more than $20m. Below that amount there are so many more investors that will be willing to look at you as a realistic prospect.
6 What’s the money for and what are the terms?
Knowing how to get investment is only part of the issue. Next you must tell us what you are asking for the money for? Why are you asking for it? When you approach an investor you should know how much money you require and what it will be used for. If you’re unsure about this then you have not shown the acumen and pursuit of economy that an investor will be demanding.
What are you giving? The rule of thumb in any funding round is that no more than 20-25% of the company should be offered to investors. Any more and, again, you are restricting yourself in the future. You don’t know how many funding rounds you might need! Going back to the previous point about borrowing as little as possible, there is no reason why you can’t seek small amounts on numerous occasions. If you are more successful in a year’s time you’ll surely get a more favourable deal.
What are you asking for? Typically, Gorilla Capital would want to see our investment go towards growth, sales and marketing. Recruitment may also be essential.
These are areas that should scale up the business. We do not want the money to be used in a way that makes the business inflexible.
As difficult as it undoubtedly is, a business can lose employees if times become hard. Other financial decisions are not so retractable.
If you want to know how to get investment and you’d like to chat to us – feel free to get in touch. We love to chat with other scale ups.