May 26, 2022

How to Build Your Investor Pipeline

Investors are central to raising funds. Without them, the project cannot get off the ground. Therefore, founders must double down on their fundraising efforts, but that requires understanding how to build an investor pipeline and funnel. Successfully funding a project only happens with a steady flow of relevant, qualified leads.

Building an Investor Pipeline

Each year, over 500,000 companies are started in the United States. However, most of those will not see a penny of VC or angel funding. Most are forced to bootstrap and make do with conventional financing. The good news is that it is possible to connect with the investing community and build a business. Founders must know how to build their investor pipeline, though.

Start with an Existing Network

Perhaps the best place to begin is with an existing network of individuals. This includes business people, CEOs, and the like, but also friends and family members. Never assume that "VC funding" must come from distant investors with no personal connection to the business. Family members and friends can be vital sources of capital.

Likewise, do not discount other business owners and other connections. LinkedIn and other business-focused websites are excellent places to start. Connect with colleagues and others you've met who have gone through the business funding process previously. Craft interesting posts that pique curiosity about the investment opportunity and the future of the business.

It's also important to be a valuable resource for others, so make sure to answer questions and provide information for other entrepreneurs and business owners. It's impossible to predict who might become an investor, so spread a wide net in the search for funding. Don't neglect connections in the offline world, either. Invite any potential investors you know out for a cup of coffee and to discuss the deal.

Create a List of Potential Investors

With a wide net cast, potential investors should begin appearing. However, not all investors are created equal and founders must be discerning here. Create a list of potential investors who are best suited to your offering. In addition to family and friends, make sure to include angel groups, venture capital firms, family offices, and corporate investors, too.

Targeting Specific Investors

Building a list of potential investors requires understanding whom to target. What makes one investor a good fit and another one a poor fit?

  • Industry – While some funds and investment groups will invest in offers across the board, it's best to keep things within the same industry. Investors from the same industry have similar backgrounds and knowledge levels which makes it easier to explain the offering. Investors and groups with a specialty focus can also bring additional value.
  • Geographic Area – Will an investor or investment group expect the project to be relocated near them? Do they prefer to invest in offerings in their immediate area only? How much help will they offer if the business is farther away? The location also plays a role in valuation. Areas like New York City and Silicon Valley will automatically lead to higher valuations than, say, rural Georgia, or somewhere in the Midwest.
  • Vision – It's also important that any potential investors share the vision for the business in question. Vision combined with personality creates an investor's attitude toward a founder and their offering, which can be a great experience or a nightmare depending on the people in question. How well do the personalities mesh with the business, the founder's vision, and the reality of the situation?
  • History – What sort of track record do the investors have? How well do they treat founders? Do they participate in follow-on financing rounds? How many successful exits have they experienced? Dig deep into investor and investment group histories to ensure a sound decision can be made.

All the things discussed above should feed into an investor's "persona". That persona will be used for outreach and communication. Business founders should create a list of around 60 or so investors/investment groups before moving on to the next step – outreach.

Strategize Investor Outreach

Investor outreach is the key to gaining interest from investors. It then leads to communication that will be used to keep them in the loop as the deal moves forward. Effective outreach can be challenging, so founders should consider using a basic draft outreach email approach or a template.

All outreach communications should be personalized to the investor/investment group. However, that doesn't mean that the bulk of the content can't be from a template or boilerplate that's reused from one potential investor to another.

It's also recommended that founders avoid putting all their top picks into the first batch of outreach emails sent out. Instead, prioritize two to three of the most likely picks and intersperse those who are less likely to be interested.

Track Investor Communication

As outreach continues, founders must track investor communication. Use replies (even those that decline the offer) to refine the message. This allows founders to build past the template and create more effective messages that gain interest and traction more quickly.

Evaluate Preemptive Offers

Preemptive offers are boons to founders. In this situation, investors want to get in on the ground floor before anyone else. To do so, they will send a term sheet without forcing the founder to go through the normal Series A hoops, and they can fast-track a project for success.

However, founders should be prepared to evaluate these offers critically. Often, founders taking preemptive offers are taking around 1.4% more dilution for less money. Scrutinize all offers to ensure they're as good as they look on paper, and make sure that the allure of avoiding all the work in fundraising isn't clouding your judgment.

The Takeaway

Ultimately, fundraising is immensely challenging. Building an investor pipeline is a savvy decision that can help founders connect with the capital they need. However, founders must approach the process of building that pipeline correctly. Cast a wide net to bring in investors large and small, vet potential investors/groups for fit and create a list of around 60 or so, and then commence outreach activities. When preemptive offers come in, scrutinize them to make sure they're truly beneficial.

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