You might be tempted to think that as a startup you don’t have much of a say when it comes to financing and choosing an investor. Since you need funding, that doesn’t really put you in a position to be picky. But here’s the thing. You choose the investor as much as the investor chooses you. In fact, you should take him through some sort of due diligence process too and analyze what he can bring to your startup beyond cash.
For a startup to succeed, more so in the case of those with first time founders, cash is only a small part of the recipe. You wouldn’t follow a recipe for stew if it boasted to enchant your guests, but in the ingredients list you’d find only beef and potatoes and no instructions whatsoever, right?
1. First and foremost, understand what your options are
What’s lacking in your startup? Do you need a bigger and more connected network? Is expertise something you’d need? Your startup’s different needs can be solved by different types of investors. Once you have your MVP, you’ll probably get in touch with angel investors. They are a good fit for startups at a very early stage. Especially because they bring expertise to the table. However, they do not have the resources a venture capital firm has. On the other hand, a VC will need a lot of data before deciding to back your startup. So analyze where your startup is and put all your options on paper.
2. Understand what role the investor will play in your startup
Investors are more than just walking cheque books. They have been in the industry a while. They come with the experience of looking at and investing in thousands of businesses. Choosing the right investor can mean great help in managing your capital, optimizing your infrastructure, keeping your budgets in check and so much more.
Consider the fact that most investors will have a seat on your board. Wouldn’t you rather have a partner who can provide valuable guidance without challenging or questioning your every step? This is why choosing an investor beyond cash is one of the most important things you’ll have to do as a founder.
3. Check if the investor has the basic foundations to help build your business
The right investor is the one that has previous experience and connections in your area, be it finance, health, biotech, software, etc. An investor who’s never worked with your industry will probably fail to fully understand the status quo, the market, the competition and will not be able to steer you in the right direction. In the end, an investor who focuses purely on software will most likely lack connections in the health or biotech industry.
The right investor can leverage their experience and connections in the market, not just the investment scene. They can connect your startup with other startups in the same market with complimentary products. Moreover, they can connect startups with market leaders or with enterprises that can use the startup as an innovation hub. Offering a network for recruiting professionals that have market expertise is also important.
“Your ability to attract, evaluate, and forge strong working relationships with co-founders, early employees, and investors often mean the difference between failure and success.”
– Clara Shih, Co-founder of Hearsay Systems
4. See if the investor or venture firm are actively supporting companies in their portfolio
Head over to their webpage or to Crunchbase and look them up. See what companies they invested in. Check how those companies did later on and reach out to their founders for feedback.
Meeting other founders in your industry can be of great help. And your greatest chance to make that happen is if your investor or VC firm introduces you. If you are a first time founder, learning from peers is incredibly important to prevent mistakes.
5. Make sure they believe in you as a founder and in the management team
While your idea can be unique and it can dazzle an investor, you need to keep in mind that implementing that idea will fall on your shoulders and the shoulders of the management team. If your investor needs a lot of convincing that you can make it happen, he might not be a good fit.
Moreover, if the investor needs to explain time and time again how you and your startup operate, perhaps you should move on. Finding an investor who understands exactly what your startup is about can save you a lot of time and failure in the future. Trust in you and your team should be an implicit part of the deal and it is non-negotiable. An investor who lacks trust is an investor who will question your decisions.
“Don’t assume that borrowing lots of money can make your startup fly. There are many things to the business other than investors, and it’s possible to succeed with your startup without breaking the bank.”
– Barnaby Lashbrooke, Founder of Time Etc.
6. Do your due diligence. Check the less traditional references too
Good and true VCs and investors will share both the successes and the less successful situations. Regardless of the reason, an investment that hasn’t turned out how everyone hoped should be one that you check out for a simple reason: it’s all easy and peachy when it’s going good, but rough times speak volumes about the true colors of your partner’s character. Talk to the founders whose companies did not do well and only then move on to the successful startups in your investor’s portfolio.
Additionally, remember that many investors have blogs. Head on over and check them out. Also, make sure to see all available interviews with your potential investors on YouTube.
As part of your due diligence process check the investor’s twitter and LinkedIn feeds, see if and how they spend time on Quora and Reddit. Check how they see business and life in general.
7. Look at the investor’s soft skills as well
The partnership with an investor is like marriage. You choose each other and you are in it together for better or for worse. At least for a couple of years. So you should like and respect each other first as people and only then as professionals.
Any serious investor will elaborate a profound due diligence. And he will spend a lot of time with you as part of said due diligence. You should use that time to do the same. Provided, of course, that your point of contact during the due diligence is the same one who will be responsible for you further on.
A good investor is more of a coach than an opponent. His job is to challenge you towards better results, not to question you. Any new investor should be a good fit in terms of team culture and attitude.
As a startup founder, you should remember that choosing an investor is just as important as building the right team. And it’s not about who has the biggest pockets. It’s about who has the right tools in those pockets.
Other useful resources:
