Startups are facing a tricky time now. On the one hand, there are many more available tools that simplify work thanks to AI-powered co-pilots. On the other hand, due to the cuts at technology companies and the general instability in the world, the market is flooded with professionals. To a certain extent, it is good, because you can hire a specialist from a large company — if you need one for some reason. However, many ex-employees launch their own startups, which leads to increased competition.
There are no more manifold capital funds and investors than before.
Those who are present are seriously reviewing their portfolios toward profitability here and now. They are not ready to concentrate all their efforts on growth and abandon thoughts about revenue for the next five years.
Since it’s more difficult to raise new rounds now, capital funds are becoming more and more selective.
You need to find financing and withstand market competition. A partner who will strengthen your position can be handy.
And if this partner is also an investor who will be in the same boat as you, it will be great.
But is it really possible?
Yes, it is.
Let's figure out what Smart Money is and how you can attract funds from this kind of investor.
The term Smart Money denotes an investor who can give you something besides the funds themselves. It can be technologies, contacts, clients, expertise, or new ways of monetization.
Let's agree that if you choose between an investor who can provide just money to you and the one with money plus additional options, the latter seems obviously more attractive.
Imagine that the former gives you more funds and the latter gives less. However, the latter’s support kit includes market expertise and help on how to effectively spend the money. If you opt for the latter, you’ll be able to make much better progress even if you get a smaller amount of cash.
Can I get not only money but also contacts, technologies, and expertise? Is it because of my rose-colored spectacles?
What to Get Started With?
So, you are a startup in advertising or marketing (our niche, to give you an example). You want to attract a smart investor.
How should you handle it?
Fundraising is a project. It’s a thing that needs to be done once.
For any project, one of the first things to start with is to deal with stakeholders, that is the concerned parties.
The market has accumulated enough practical expertise and research results to make a conclusion. With long-term development, the win-win scheme is much better than the situation when your victory results in a loss for the other side.
Let’s transfer this piece of wisdom to the market of startups and investors. You should understand not only your interests and tasks but also those of your investors. If you can prove that their interests are served, it will make sense for them to respect yours.
Imagine you have found three large companies that invest strategically and you are examining other ways they can help you.
Let's look at the market from their point of view.
Investors are waiting for perfect startups to support
How Do Investors Look at Startups?
Every day, investors receive applications from startups. Some get less and others get more. Anyway, applications arrive in large amounts. One should be very naive to believe that someone has a magical sense of a unicorn and will always be able to choose one or even ten companies out of 100 that will be super successful.
It's impossible and no one can do that.
What is the investor supposed to do then? To remove those that will definitely fail. That is, filter out the weakest instead of looking for the fittest.
There are also subjective aspects here, such as “I like it/I dislike it” or “I believe it/I disbelieve it”. And there are objective aspects.
For example, can the team clearly tell the investor what they do? In fact, the answer in 60%+ of cases is negative — they can't.
Or, do they know how to speak the language of numbers? Can they show themselves and their market with numbers and P&L? Few people are capable of it at the beginning.
This is how the investor thinks: “If the project’s team fails to collect the basic P&L with their expenses and income for the previous period and at least for the next year, how can I entrust large sums to them?”.
Such simple filters can cut off around 80% of applications submitted to the capital fund.
It makes sense for the investor to familiarize themselves with the rest of the projects and study their details.
As a result, they need to decide which ten projects to invest in. Eventually, at least one out of ten should be able to return to the investor the entire amount spent on all ten projects.
Here, we approach the essence of the topic — the investor's business model.
Today, the new business model might seem freaky and unusual. But soon, the future can belong to it
How Do Investors Make Money?
The most classic and basic way for an investor to make money is to sell their share in a startup after the project takes off. Alternatively, they can receive dividends — that is, part of the profit. This second option comes into play if the investor doesn’t want to sell their share in the project for some reason.
This is how 98%+ of classic venture funds make money.
However, times are changing not only for startups but also for investors. Everyone has to adjust. Often, this basic business model is not enough. Then, smart money starts from the investor's side.
How do you invest in startups that let you earn money not only on sales and dividends?
Everyone answers this question individually. As a result, we came to this model, dubbed it a dual economy, and are looking for appropriate projects. More information on the matter can be found here.
A well-known example of this approach is Microsoft's investment in OpenAI. Yes, these are great prospects. The project has grown dramatically and is valuable. However, among other things, there is a clause in the terms of their agreement that Open AI should use Microsoft Azure servers (probably, I don't have access to their legal docs).
This means that for all the 10+ years while the project is growing, it will be buying server capacity from Microsoft. In addition to the fact that Microsoft will receive its dividends or sell shares, Open AI will pay for its servers every month for all these ten years.
Imagine that we are not Microsoft but just a classic venture fund that entered the same round. Then, our economy will look significantly worse and riskier than the same investment in the same project for Microsoft.
This is an example of what we call a dual economy — or smart money on the part of the investor. And that's exactly the kind of deal you want to have more than the classic ones.
A classic venture capitalist just got to know that their competitor signed a dual economy agreement with a promising startup
How to Pair the Interests of a Startup and an Investor?
Above, I described what an investor expects. Let’s imagine that you have passed their basic filters on data hygiene and financial reporting as well as have found a common language with them. Then, they are waiting and looking for an answer to the question: why exactly should they invest in your startup?
In other words, this means “How can I make money on your startup, in addition to exit and dividends?”. The more reasons you can provide, the better.
This is also great for the project. The win-win scheme should be preserved. Therefore, both the investor and the startup strive to make their cooperation fruitful for both sides. It shouldn’t prevent the project from growing.
We return to the moment when you found three companies in the market that invest in your field.
What should you do?
Start generating a backlog of ideas. Here are these three companies and that's what they have. Usually, businesses don’t hide information. If a company is large, it's not a problem to see which assets and products it has.
Make a list of ideas that can lead to a dual economy between you, or synergies.
Rank the items on your list and start verifying ideas.
Here you can find out where to collect ideas and how to filter them.
Your goal as a startup is to put the idea into practice. Here is the essence of this concept: if you take "this part of their company" + "your product", then, it works together and generates value.
Here are the examples:
- The audience that the investor has buys your product.
- Your audience buys their product.
- You can attract B2B clients for the investor's services or products.
- Your growth correlates with the goals that the investor declares.
- Your product in conjunction with their product provide joint value. People are willing to pay more for the joint value, compared to buying each product individually.
- You need the investor's product or service to grow. If they become your partner and provide this product or service, your economy will perform better than your competitors and you will grow faster.
If it works, the fundraising process will be very fast.
You come to an investor. You say that you have already conducted a Pilot — that is, an experiment. Your product in conjunction with their product, service, or customers has value — and this is how this value is expressed in money.
Hopefully, you explain it all clearly and people who listen to you are perceptive enough. Then, the issue of fundraising and possibly also selling your project can be solved immediately.
To conduct a pilot, sometimes also called Proof of Concept, you might need to do it together with the project. It may take a long time. However, practice shows that in seven cases out of ten, this is due to a lack of experience in testing hypotheses and not for any other reason.
In most cases, even without coming into contact with the investor, you can test the idea yourself — and do it much faster than in cooperation. It takes a long time to coordinate everything for a large company. Alone, you can cope with it much quicker. Buy their product — or a similar one and pretend that you have their product. Then, check their reaction. It won’t take you too long.
This young startuper is ready for the fight!
To Sum It Up
- Look for those who can give you more than just money.
- Make sure that you are eligible for the investment. For this purpose, it can be reasonable to go through any sensible accelerator. Alternatively, you may find someone who can advise you from the position of investors or startups that have already raised funds from investors. We at https://mitgo.vc/ can also help you with this (if you are an AdTech, MarTech niche, or affiliate publisher).
- Remember about the interests of the investor. Your task is to help them see why it is necessary to provide money to you.
- The best answer to the question “Why should investors support you?” is experimental data. You take what they give to you, add your product, and get value. Package this data in a comprehensive manner and show it to the investor.
- It’s better to get less but better. It’s not necessary to send out your application to 100,500 capital funds. Instead, find five that are close to your field. Try hard to formulate the reasons why you should seem noteworthy to them. Your time expenses will be equal in both cases. However, in the latter case, the conversion from the round will be higher.
Good luck, and never associate funding failures with your personal self-esteem! An investor may have 99 reasons why they might be not ready to invest in you right now. This is definitely not because you are bad at it. You have chosen a very challenging path as a startuper. You deserve to be honored and praised for this reason only. You cannot be bad at it. All you need to do is to find a partner with whom you will have a match. And if there is no match, then why do you need such a partner? 🙂
