As a venture capitalist, I have seen countless startup founders struggle to find the right investors for their businesses.
The process of choosing and approaching investors can be daunting, especially for first-time founders. However, with the right approach, it is possible to attract investors who not only provide the necessary capital but also bring value to the table.
In this article, I will share my insights on how startup founders can choose and approach the right investors.
How to choose the right investors?
When choosing investors for your business, it is important to consider the following factors:
- Investor type: There are different types of investors, including angels, venture capitalists, private equity firms, and family offices. Each investor type has its own investment preferences, target industries, investment size, and expected returns. You should research and identify which investor types are most relevant to your business and stage of development.
- Industry focus: Some investors have a specific focus on certain industries or sectors, such as biotech, fintech, or real estate. It is important to identify investors who have a strong understanding of your industry and can add value beyond just capital.
- Investment size: Different investors have different investment sizes, from a few thousand dollars to millions of dollars. You should identify investors whose investment size aligns with your funding needs.
- Investment stage: Investors also have different investment stages, ranging from seed funding to growth stage. You should identify investors whose investment stage aligns with your business stage.
- Investment history: You should research an investor’s investment history and track record to understand their investment style, investment philosophy, and successes and failures. This will help you determine if they are a good fit for your business and if they can provide value beyond just capital.
- Geographic location: Investors may have a preference for investing in certain regions or markets. You should identify investors who have a presence in your geographic region and can provide local support and connections.
- Network and connections: Investors can provide valuable connections and access to networks of other investors, customers, and partners. You should identify investors who have a strong network that can help your business grow.
- Investment frequency: Investment frequency refers to how often an investor invests in startups. Some investors invest frequently, while others only invest occasionally. You want to choose investors who invest frequently.
- Companies they’ve backed: Knowing the companies that potential investors have previously invested in, including any competitors to your company, can provide valuable insights into their investment strategies and preferences. It can also help you determine whether the investor may have a conflict of interest in funding your company. If the investor has previously invested in a competitor, it may indicate that they have expertise and interest in your industry, which could make them a good fit for your company. However, it is important to understand the extent of their investment and relationship with the competitor, as this may affect their willingness to invest in your company.
- Lead vs follow: Lead investors are typically the first investors in a company’s funding round, and they often have a significant influence on the terms of the investment and the overall direction of the company. Lead investors are important because they help to establish the valuation of the company and can bring in additional investors to the round. Follow investors are typically those who come into the funding round after the lead investor has already been established. They may not have as much influence over the terms of the investment, but they can still provide valuable funding and expertise to the company. When choosing investors, it can be helpful to first secure a lead investor and then look for follow investors to round out the funding round. The lead investor can help to establish credibility and attract other investors, while follow investors can provide additional funding and support. It’s important to choose investors who are comfortable taking on the lead or follow role, depending on their preferences and expertise.
How to find them?
Finding investors can be a daunting task for many entrepreneurs, but it is a crucial step in getting a startup off the ground. It requires a lot of research, networking, and perseverance.
Investors come in different shapes and sizes, and not all investors are created equal. It is important to identify the right investors who share your vision and can help you take your business to the next level.
In this context, there are several tips that can help you in your search for investors, from leveraging your personal and professional networks to attending startup events and leveraging online resources.
- Research the Investor Landscape
The first step in finding the right investors is to research the investor landscape. Every investor has a specific area of focus, whether it be industry, stage, or geography. Understanding this focus will help you identify the investors who are most likely to be interested in your business.
There are several resources that founders can use to research investors. One of the most popular is Crunchbase, which provides information on funding rounds, investors, and startups. Other resources include Pitchbook, AngelList, and LinkedIn.
- Develop a Target List of Investors
Once you have a good understanding of the investor landscape, it’s time to develop a target list of investors. This list should include investors who have a history of investing in companies like yours and who have the potential to add value beyond capital.
When developing your target list, it’s important to prioritize investors based on their potential value-add. While it may be tempting to focus solely on the investors with the largest check sizes, it’s important to consider the value that each investor brings beyond capital. Look for investors who have experience in your industry, who have connections that can help you grow your business, and who have a track record of success.
- Leverage Your Network
One of the most effective ways to approach investors is through a warm introduction. This means leveraging your network to connect with investors who may be interested in your business. Reach out to friends, family, mentors, and other entrepreneurs in your network to see if they can introduce you to potential investors.
When asking for an introduction, be clear about what you’re looking for and why you think the investor would be interested in your business. It’s also important to make sure that the person making the introduction is comfortable doing so and that they have a strong relationship with the investor.
- Attend Networking Events
Networking events are a great way to meet potential investors and build relationships with them. Look for events that are focused on your industry or stage of development. This could include pitch events, conferences, and meetups.
When attending networking events, be prepared to talk about your business in a concise and compelling way. Have a pitch deck and executive summary ready to share with potential investors. It’s also important to be open to feedback and to use the opportunity to learn from other entrepreneurs and investors.
- Approach Investors Directly
If you’re unable to secure a warm introduction or attend networking events, you can approach investors directly. This can be done through email or social media.
When approaching investors directly, it’s important to do your research and personalize your message. Start by introducing yourself and your business, and explain why you think the investor would be interested in your business. Be sure to highlight any relevant experience or connections that you have.
- Be Prepared for Due Diligence
Once you’ve identified potential investors and have started conversations with them, it’s important to be prepared for due diligence. This means having a strong understanding of your business, including your financials, market opportunity, and competitive landscape.
Investors will want to see a detailed business plan, financial projections, and a clear understanding of your go-to-market strategy. They may also ask for references and conduct background checks on you and your team.
- Evaluate Investor Fit
Finally, it’s important to evaluate whether an investor is the right fit for your business. While it may be tempting to accept investment from any investor who is willing to provide capital, it’s important to consider the long-term implications of the investment.
When evaluating investor fit, consider factors such as the investor’s experience, connections, and track record of success. Also consider the investor’s investment philosophy, including their investment horizon, expected returns, and level of involvement in the business.
It’s important to choose an investor who aligns with your long-term goals for the business and who can provide value beyond capital. A strong investor-founder relationship can be a key factor in the success of a startup, so take the time to find the right fit.
In conclusion, finding and approaching the right investors can be a challenging process for startup founders. However, by researching the investor landscape, developing a target list of investors, leveraging your network, attending networking events, approaching investors directly, being prepared for due diligence, and evaluating investor fit, you can increase your chances of finding the right investors for your business.
Remember, finding the right investors is not just about getting capital. It’s about finding investors who can provide value beyond capital and who align with your long-term goals for the business. With the right approach, you can build strong relationships with investors who can help you grow and scale your business.
Once you have identified potential investors based on these factors, you should prioritize them based on their relevance to your business and stage of development. You should also prepare a customized pitch for each investor, highlighting how your business aligns with their investment preferences and how you can provide value to them.
Here are some other posts on venture capital and fundraising.
- Difference between startup capital and working capital
- Why do startups need funding?
- How to get into angel investing & be an angel investor?
- How to become a VC startup scout and make money on the side?
- What are the different roles & job titles in venture capital?
- What’s the role of a Venture Partner?
- The advantages of investing in startups through an angel syndicate
- What are the different kinds of financial instruments available to angel investors and VCs for investing in startups?
- How VCs are controlling the narrative of what constitutes as a good business?
- Startup term sheets: Everything you wanted to know
- What is dry powder in venture capital & startup investments?