Why Good Investor Proposal Letters Are Vital for Startups

Why Good Investor Proposal Letters Are Vital for Startup Inventors

Startups find themselves in need of investor capital in order to scale. Crowd-funding is certainly an option, but it is not assured and may not bring in the amount needed. It becomes the job of a founder, then, to solicit funds from capital investors, whether they are part of a funding group or individual “angel” investors.

The Proposal (Cover) Letter

In an investment proposal, there will be a large amount of material presented to potential backers. That material may very well include detailed information about the first years of the startup, the original business plan and progress toward it, balance sheets, a plan for moving forward, etc.

But perhaps the most important piece in this proposal packet will be the cover letter. It will be read very closely before there is a more detailed inspection of the other content in that package. That cover letter must be designed to spark interest, to allay any concerns, and to present the business as an exciting prospect for investment.

What Should That Cover Letter Contain?

The cover letter will be less formal than the other documents that will be included in the packet. It can be considered a shortened version of the business plan from this point forward, because it will present some detail about the business and, most important, what the founder intends to do with investor funding to move the startup forward.

The most important thing to keep in mind is the audience and that audience’s concerns. With that in mind, here are the components of an effective cover letter.

1.      Establish Identity and Credibility

This is the opening of your cover letter. Basically, you are going to take that elevator pitch that you use when you are “out and about,” expand on it, and turn it into a shortened executive summary. It should be about one paragraph in length and contain the following:

• The problem you intend to solve for your customers/clients and your solution to that problem.
• Summarise progress to date in providing that solution successfully, or research that has been completed on the viability of the product or service for the target demographic.
• Briefly describe your qualifications, any successes you have had to date, or any background employment both in this sector and in team management. Basically, you want them to understand that you know your market and that you know your product/service
• Avoid sector jargon

Think of this part of your cover letter as similar to that which you perhaps crafted earlier in your career when you were seeking employment. You may have even used a professional cover letter writing service. Re-read that letter now, with an eye to how you presented yourself, as you now craft this first paragraph.

2.      Describe Your Team (if applicable)

One thing to remember is that investors are as keen on people as they are on the product or service. If you have a team, then you need to describe each individual, with background and qualifications (education, background in the sector, and position within your startup).

If you use any outside advisors or consultants, be sure to mention them and the unique expertise they bring to your business. This provides greater credibility for you and your business.

3.      Requesting Funding

State exactly how much funding you need right now. Any potential investor will want an exact figure. If, for any reason, you cannot provide an exact figure, provide a prediction and justify it through your experience thus far. You will want to tie that funding directly to specific objectives – investors need to have a clear picture of exactly what their money will be used for and why you need the amount for which you ask. Break the funding down into specific categories as much as possible – how much for marketing, how much for operations, how much for staffing, etc. If you don’t do this, you look disorganized and badly prepared.

The smart thing to do at this point is to only request the amount of funding you need for the next phase of development. Investors tend to like short-term funding rather than the long-term funding to support your 10-year goals.

4.      Re-Payment

What type of return are you planning for your investors? You need to provide very clear projections of their ROI. These may include any of the following:

• A bond or preferred stock
• A percentage of ownership in the company
• A percentage of company profits
• A promissory note backed by collateral at an attractive interest rate

The key here is to make the return valuable enough to whet their appetites to cough up the funding.

5.      SEC Regulation D/ Offering Circular

These will not be a part of your cover letter per se, but should be included as enclosures and mentioned as enclosures at the end of your cover letter.

• SEC Regulation D: The SEC has very clear regulations about soliciting investments, and no investor wants to be any part of a violation of those regulations. While most startups do not have to register with the SEC, they do need to file the “D” exemption from that registration. Most investors are aware of this rule, so it is important to ensure them that it has been complied with. There may also be state regulations and a requirement to register with the appropriate state agency – these must be named and compliance confirmed.
• Offering Circular (if required): This will be necessary if a founder has not filed a SEC “D” exemption. It is a summary prospectus that addresses just the highlights of the longer prospectus document. Again, this should be mentioned as an enclosure at the bottom of the cover letter.

Get Help if You Need It

Putting together a cover letter, indeed, an entire funding proposal is a monumental task, and there is much riding on getting it right. That cover letter is the key piece, however, because it will determine whether potential investors decide to move further into your proposal because they are excited or trash it because there is no interest. Your job is to create excitement. If you are struggling with creating that excitement, get some professional help.