Finding a good investor can be crucial for many projects since they can bring more than just resources and can help the startup reach its growth potential. But founders often struggle and get frustrated with the process, either out of inexperience or out of the pressure of securing investment as fast as they can.
The truth is that fundraising can be a long painstaking process, with countless emails, meetings, and answering lots of questions. In the end, it is as important for the entrepreneur to choose the right investor as it is for the investor to select the right startup to invest their money into.
It can be hard to quickly figure out if an investor would be a good fit for your startup. So, you should commit to it not as speed dating for investors, but as a long-term approach where you are not just raising capital, but investing in human capital and relationships. Pre-screen a target list and develop a relationship with potential investors built on mutual trust and alignment of values.
Don’t forget you have to do your own due diligence: ask these questions as soon as you start meeting to understand the potential fit and the value they can add.
- What is their investment philosophy?
Start by understanding the investment strategy of each investor. Even before the first meeting, you have to question if they are looking for long-term value creation or short-term profit, or might have a specific industry or geographic focus. Pure financial VCs can be appealing, but especially with the first investor you choose to join the company, look for someone who you genuinely want to work with. Aim for an investor that can help you in the long run with the challenges of running a new business.
More than just money, consider if he/she has the background, experience, and motivation to help you grow. Don’t forget you’re choosing a partner and not just a cheque.
- Does the investor understand or have experience in your business?
As you may have figured out by now, it’s not all about the money. Is it crucial that your investors understand your business model or have experience in your particular industry/sector. In some cases, this can be a dealbreaker, in others not that much. Start by taking a deep look at the current portfolio and focus areas. What does this indicate about their know-how of your business? Is there any complementariness or maybe some potential conflict of interests?
For a VC firm, search the background of all the partners and the complementary expertise they can bring to the table. Your business will benefit from an investor willing to share their network and bring on other investors or clients, so understand how their network of contacts can translate into leads, partnerships or market access.
- What is the investment process?
It is important to clarify what to expect from the process of each investor. From the first meeting, you should be knowledgeable about this to avoid delays, miscommunication and false expectations. This question comes with several straightforward sub-questions:
How many investments do you make per year, and what is your typical ticket (investment amount)? Do you usually lead financing rounds? Who do you typically co-invest with? Where are you in your own funding lifecycle? What are the factors and criteria for the investment? Do you reserve some funds for follow-on investment?
With these questions, you can better plan negotiations and ensure you’re not wasting each other’s time, by getting to know the practical details of an investment contract. Take advice from experts and mentors, as deal terms are frequently just as important, and in some cases more important than a valuation. An extra word of advice, I’ve never met a VC who describes their process as slow…. so, take best-case scenarios with a pinch of salt and pepper. Add an extra question to frame negotiation timelines: How long did your last investment take from first meeting to money in the bank?
- What does the investor expect when interacting and dealing with a CEO?
If you are looking for a partner, it is important to ask your potential investors how they plan to engage with your startup: Will you be personally involved? Will you be happy to give strategic guidance? Will you offer specific support (as market data, compliance or legal), or will you take a board/administrator seat? Bring up questions related to expectations about the future of your business and the investor’s plans to help increase the value of your startup.
Talk with CEOs of their current and past portfolio companies to understand what to expect in topics as valuation; key negotiation tactics; how much “hands-on” can you expect; alignment in exit strategy, etc.
- What do you want?
This is probably the most important question you need to answer before meeting an investor: what is it you want from them?
Be sure about your long-term goals: present your strategy in bold, and make explicit terms that capture your aspirations. To attract people and resources, the strategy must embody your vision of where the company is going instead of where it is, so it provides a framework for the sustainability of your business. If you are clear about this, you’ll be a secure, trustworthy and interesting founder to negotiate with.
You should choose an investor only if their funding strategy matches your vision. Start by asking and answering these questions along the way, so you’ll put yourself in a much better position to get the outcome you want and find the right investor for your startup.