Young startups are in a vulnerable stage and the key to success doesn’t solely revolve around the innovative product or service being promoted. Every startup founder dreams of landing a meaningful amount of investment. While it can be tempting to simply accept checks from anyone who is willing to put down, your investor choices can destroy your dreams or become a source of power breaking down barriers on your flight to success.
Of course you are not always in a position to pick and choose, however, remember when you on-board an investor, that person or institution will be around for long time as they become a part of your cap table and have huge impacts on your business. Therefore, it’s critical to choose the right one, even for the smallest amounts of initial seed funding.
Here are key factors to put on your checklist when searching for and selecting investors to participate in your next round of fundraising:
1. Have you clearly decided on your investment course?
Before starting the long and nuanced process of scoring venture capital funds for your company, make sure this is the path you want to take and your company will truly benefit from the partnership. Sure, if you seal the deal you’ll have access to the funds you need, but venture capital comes with strings in the form of a seat on your board of directors.
If you don’t want to give up any control, venture capitalism may not be a fit for your company. Many entrepreneurs don’t have a board and don’t even think they’ll need one, or aren’t sure who should be on it, and putting one together may not make sense for their company.
With venture capital, you are also often limited in the amount of money you can ask for. When all you need to get started are a few software engineers and a small office, that’s overkill. You may need more of an angel investor, who’s usually a single, wealthy person who has less money to invest but will mostly stay out of your way.
Sometimes start-up companies, with a full board of directors and positive cash flow, may not benefit from collaborating with a new investor. The start-up company may find itself well suited to go forward and achieve growth on their own.
2. What is their investment strategy?
All investors, from VCs to angel investors, have their own investment focus and habits. For example, they may only invest in certain geographic locations, stages of startups, specific industries and the list goes on, so try to get that intel before wasting time.
You need to look at your and their portfolio to understand if their investment focus is on your product/service or not. For example, if you are an insurtech startup, you cannot expect to get funded by the investors who are solely interested in medtech.
One of the most foundational steps is making sure that you are searching for the right level of investors for your stage or round. You must understand who you are, is your business at Seed Stage or Series A, Series B? Everyone seeks for that VC money. Yet, before getting there, you’ll probably need to be holding angel investor and friends and family funding rounds.
- Ticket size
Before outreaching investors knowing amount of fund you are planning to raise and percentage of share you are willing to give in exchange for the money is a must. Look for investors who have their ticket size meet your requirement. For instance, if you are looking to raise $1M, it would be waste of time to outreach investors with funding scope of $250-500K.
Geographic location is also an important factor in investment capital. For example, investors whose investments happen mainly in Europe, there is little or no possibility of a startup in Malaysia being able to receive capital from them because it is not the area where they want to invest, they would feel unsafe to invest in a location that is out of their control. So, paying attention to geo-focus is crucial.
3. What can they bring to the table?
Startups should consider what VC can contribute to their success, what additional value you get when getting funded. The fact that a company has been funded by a respected fund/partner alone can increase a company’s odds of success, because that brand makes it easier for the company to attract employees and investors. Later-stage VCs pay careful attention to who the earlier funders in a company are, using the reputations of the funders as a proxy for their own diligence.
a. Ability to fund
Fundraising is enough of a time and effort consuming process for startup founders. You certainly don’t want to wasting any more time on those who don’t really have funds available to put in. Investigate investors’ profiles and answer these questions:
- When was the last investment?
- How much does the investor have left?
- How are the investor’s other investments performing?
- How strong is the investor financially?
You don’t really want your business to be the only hope for the investor. If the investor isn’t doing well financially, that person/VC is going to be under a lot of stress, and that pressure will flow down to you. Even if the case isn’t that serious, it is clearly more efficient and profitable to have an investor partner that is able to provide follow-on fundings on his/her own or connected to others with capital.
If you see a venture capital firm that has not made new investments, not follow on investments, in a six month period high chance that they are running out of capital on their fund and having troubles in securing the next fund. In this case save yourself time and move on to another firm that has the ammunition to pull the trigger.
b. “Strategic” capital (aka “smart money”)
In a recent survey of start-ups, TechInvest identified a big shift in the way start-ups are conducting their sourcing of capital. Increasing number of start-ups has realised that ‘strategic’ capital can far outweigh ‘idle’ capital.
A good VC/CVC can add value to startup by offering expertise and value without interfering in day-to-day operations. In addition to network and influence that the investors have in your industry, the fact that investors are involved with so many companies means they bring ample experience. When it comes to board/management relations, they have seen it all.
Look into the ecosystem and investor’s investment portfolio, asking yourself:
- How big is the investor’s network locally and internationally?
- How is reputation of the investor within your industry and the existing relationships that the firm has with industry players (or perhaps the lack of such relationships).
- How big and interesting are the portfolio companies?
- Would these companies give you better insight into the ecosystem or access to potential partnerships where opportunities arise?
For example, some of the top tier early stage VC investors like Firs Round or Andreessen Horowitz have a tremendous amount influence in the venture space. If they invest in your company they could also support you with resources around HR, marketing, subsequent financing rounds, etc. That type of value is something to look after when doing your capital raising efforts.
4. Do they usually do follow-on funding?
Stepping into other fundraising rounds and finding new investors are both expensive and time consuming. Moreover, it also dilutes your ownership and can make your business less attractive to others in the future. So knowing if investors have the ability and habit of participating in future funding rounds will be very useful down the road.
5. Do you click on a personal level?
As mentioned, once you onboard an investor, it’s for the long-run. There needs to be a deep level of understanding and the personalities need to mesh, otherwise it will never work. Getting to know who is investing in your company is key, and should especially be true when it comes to lead investors or majority stakeholders. Speak to as many portfolio companies as possible, especially the ones that didn’t have loads of success. It would help you unveil what type of personality you will face when the heat turns up.
Obviously, who you pick as the investor is absolutely critical to your future. It will make or break your business. These factors can be part of a strong checklist for searching potential investors in your startup. Keep this in mind when tackling due diligence, engaging in investor meetings, preparing questions and get yourself ready.
Don’t just settle for money, look at what else an investor can bring about. This doesn’t mean investors are going to come in and take over your business. But perhaps they can lend their experience to help you make traction. Sometimes all it takes is a few tweaks you hadn’t thought of. What’s offered could be business-related in general, industry-specific expertise, or, simply funding and the financial aspects of your venture.