One day in August 1998, Sergey Brin and Larry Page were very nervous. In just a few hours, they had a meeting with potential big investors David Cheriton and Andy Bechtolsheim. Brin and Page wanted to present their project Google, a web search service that no one had heard of at the time.
The meeting took place in the backyard of Cheriton’s house, where Brin and Page began their presentation. Cheriton and Bechtolsheim were hooked in the first minutes. Brin and Paige had come up with a revolutionary idea: payment for clicks. Google left the encounter with a $200,000 investment, and its patrons left with great hopes for significant profit.
This deal provided Google with critical cash supplies to fuel its development. It would also eventually reward Google’s “business angels” — early investors who gave the great idea the resources it needed to succeed — with superb returns. By 2018, Bechtolsheim’s share of Google was estimated to be worth $7 billion.
There are tens of thousands of deals like the one made between the founders of Google and business angels like Cheriton and Bechtolsheim concluded each year, but there are still many promising projects that never manage to get noticed by the right people. We’re here to help with that.
We have prepared a series of materials on investing in business projects at different stages of development. The first article provides an overview of two financing methods – FFF and business angels.
A startup that’s still in the idea stage can survive for a while without funding. Its founders may have enough knowledge and time to develop their project with their own resources. But in the latter stages of start-up development, it is difficult to grow without funding.
Product startups need to buy examples of their competitors’ products to study their function design, and other aspects. Software projects need to pay for top versions of operating systems and other critical products to explore the market.
Both can draw on funding from friends, family, and entrepreneurs who believe in the startups’ big idea. In the business community, this method of financing is called FFF – Friends, Family, and Fools.
Friends, relatives, and brave investors can provide any amount for the development of the project – whether it is $100 or $100,000.
These funds may be given without an expectation of repayment, like grants. In this case, the fate of the project matters considerably less to its benefactors, because the invested funds were, in fact, a gift. Alternatively, there could be repayment terms, which means that the money is given as a loan. The project founder would promise to repay the money they received over a certain period, perhaps with interest.
These startup benefactors and entrepreneur recipients can conclude contracts to clearly delineate their rights, obligations, and expectations for things like return on investment and roles within the project. This can go a long way to avoid misunderstandings and maintain relationships with friends, family, and networks, regardless of how the project turns out.
Funds received from these contracts can offer two big benefits. The first is the financing of things like research, purchasing licenses, other key costs of getting the project underway. The second benefit is that they lend credibility. If an entrepreneur can show that they’ve managed to convince people in their FFF network that their idea deserves financial support, it becomes much easier to convince more formal investors that the project merits their attention and patronage.
The faster a project develops, the more financial investments it needs. This is where business angels come in. These are experienced serial entrepreneurs who have already opened numerous successful companies.
The lion’s share of these business angels are located in the United States, and their numbers are continuing to grow. The US Small Business Administration estimates there are over 250,000 investors in the United States. There are many times fewer investors in neighboring Canada, which reportedly has from 20,000 to 50,000 thousand business angels.
Business angels can provide huge amounts up to several million dollars. For example, the founders of Google received a total of around $1,000,000 from business angels, which helped their innovative project to develop rapidly.
Unlike FFF financing, angels do not give out funds out of kindness – they demand profits from their investment. According to statistics, only 20% of startups generate profit, and about 90% of startups die in the first year. In addition to money, the angels also receive a share in a project.
Andy Bechtolsheim, for example, received around a 1% stake in Google, but his example is more the exception than the rule. Business angels more often demand stakes of 10-25% in the companies they invest in, and sometimes even up to 40%.
Business angels also frequently act as mentors to the recipients of their investments. They often work to support the team, give advice, help the project grow faster, establish business processes, provide connections, and solve other problems.
In order to ensure financial and legal clarity, startups sign detailed contracts with business angels. These contracts not only dictate the order of return on investment, but also delineate roles within the project. It is not uncommon for “angels” to end up making the most important decisions on the project, and sometimes even completely change the founders’ original plans.
How to get your first investment
To get FFF funding and attract the attention of business angels, follow these key guidelines:
1. Share your project whenever possible.
Almost every day, you have chances to meet new people and sell them on your business idea. Work to build these networks at free events, webinars, courses for entrepreneurs, and on your social media.
Another opportunity to meet investors is business events, as well as specialized competitions for startups, such as the Vernadsky Challenge, Ukrainian Startup Fund competitions, and many others.
You can share your business idea with the world on platforms like Medium, where entrepreneurs from all over talk about their successes and failures. These places are full of people happy to give advice to newcomers about what problems they may face when creating a startup, as well as what things can help their development.
Special Facebook groups can also be helpful for finding leads on funding and support. One example is the Women in Tech group out of Berlin, which offers help to women startup entrepreneurs.
2. Develop an elevator pitch
Pitching is the art of delivering short presentations on yourself, your ideas, and what you want to do. They usually run up to ten minutes long, but sometimes you have far less time than that to get your message across.
Elisha Otis founded a world-famous manufacturer of elevators and escalators back in 1853. He had also invented a revolutionary new braking system to bring elevators to a safe halt if their cables ever snapped, but he struggled to find a way to convince people of the value of his invention. He chose to demonstrate his elevator brake with a great spectacle during an exhibition in New York City. Standing before a crowd, he ascended three stories in an elevator before instructing an assistant to cut its cable with an axe, terrifying the spectators. However, thanks to the elevator brake he invented, Otis came to a safe halt instead of falling to his doom, leaving onlookers thrilled, relieved, and in perfect understanding of how useful his invention was. This episode is the origin of the term “elevator pitch,” during which people make pitches for themselves, their companies, and their ideas in the space of time allowed for during a chance encounter on an elevator. When opportunity opens its elevator doors to you, you need to have yours ready.
3. Be sure to take contact information from potential investors
Save business cards, phone numbers, and email addresses you receive from people who could turn into potential investors, and be sure to contact them shortly after meeting in order to remind them of who you are and what your project is. Investors receive a lot of offers, and you don’t want to lose out on an investor just because they couldn’t remember your name.
4. Build trust
Investors usually invest in people, not just business ideas. To gain their trust, show them the path you’ve already taken and how much you’ve invested from your own resources to bring your project to life.
5. Set realistic predictions
Experienced entrepreneurs will quickly figure out if a startup hasn’t done their market analysis homework. To prevent this, you need to prepare carefully and make a realistic forecast and development plan for your project.
It’s hard to imagine a world today without startups. In so many cities around the world, a tourist can use Uber to get from the airport to the hotel that they reserved through Booking.com, all without having to deal with issues like currency conversions or language barriers.
These companies and ones like them began as startups. They were able to find support from investors and work their way to billions of dollars in market capitalization. If you’ve got a great idea and just enough luck on your side, all that stands between you and similar success could just be attracting the right investment.