Four Reasons Why It Is Never Too Early to Build Relationships with Investors

26 Mar

By Michael Quigley, Director of Research, LSN

mike-2Entrepreneurs we work with often ask us when they should start contacting investment firms. Almost invariably, our answer is as soon as possible. That doesn’t mean a company should feel rushed into sending out unfinished, sloppy, or overly cumbersome marketing materials. You should take the time to organize your brand, from logo to tagline to pitch deck and executive summary, so that you have a professional and concise package. Any upcoming data or potential partnerships or collaborations can be easily added into the materials as they come into fruition.

If a company is waiting for an event or to receive certain data before formally fundraising, outreach can be framed as an introduction to the company, rather than a direct solicitation for funds. In this case the purpose is simply to begin a relationship. As always when reaching out to investors, it is crucial that you contact people who have interest in your sector and technology, otherwise they are unlikely to be willing to engage in even an introductory conversation or be able to help you when you are formally seeking capital. Building investor relationships early allows companies to:

  1. Establish a Communication Channel

At the very least, this practice gives companies the opportunity to cultivate an investor contact who knows who they are and what they are doing, and who will be significantly more responsive and upfront with feedback when the company formally starts to raise capital. This is the first step in developing any investor relationship, and gives fundraisers a head start on their process no matter where the company is in their development.

  1. Demonstrate Growth/Progress

Reaching out and explaining a plan and future company goals and milestones gives an entrepreneur the opportunity to show potential investors progress and growth over time. This will increase their faith in your ability to manage the product, making the company a more worthy potential investment. Investors aren’t investing in a snapshot of a company at a given date and time; they are investing in the entire lifeline of development. By providing them with a real-time window into that process, you help make the picture more clear and understandable.

  1. Build Trust

Trust is crucial in any relationship, especially when it involves financial capital. By speaking periodically, demonstrating growth, and, perhaps most significantly, explaining any hiccups that led to missed milestones or forecasts and what was learned from them, an entrepreneur can forge a strong bond with an investor. This level of trust can be invaluable, particularly when a company begins looking to secure a lead investor.

  1. Create Pipeline for Future Rounds

Early stage entrepreneurs in the life science field will almost inevitably have to raise multiple rounds of financing, and there is also a good chance that each round will include different investors. By building relationships early with investors allocated at various stages, you can decrease not only the time required to raise your first round of financing, but also that of your future rounds. Having seen a company grow over a few years further strengthens the bond and level of trust an investor feels with that startup.

Waiting until you have limited runway in terms of capital on hand can be a death sentence for an early stage company. Since the average fundraising campaign takes between 9 and 18 months, entrepreneurs must do all they can to streamline and advance the process as early as possible. It is often apparent to investors when a company is running out of cash and time, and that can negatively affect their valuation. Over the years we at LSN have seen a number of companies fall into this trap, and you do not want to join that club. Get your materials together, identify targets, and start reaching out, getting feedback, and building relationships. You will be glad that you did.

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