An investor is much more than someone who gives your start-up a cash injection. They’re also a business partner, a mentor and a new boss for your employees. They’re someone you’ll work with closely and, in some sense, work for.
So when you look for the proper investor for your company, you need to care about more than the amount of money they're willing to put in.
Why is it crucial to bring in the correct investor for your business?
Investors can bring much more to the table than money. They offer business advice, help your business grow and make critical introductions to other investors.
Your investment partner will be part of your start-up journey for at least ten years. During those ten years, they will have a say in how you run your company.
You’ll be working closely with them and rely on them in stressful conditions. So, take the time to get to know them well. You want someone you can trust, respect, and work with in a way that fits your company brand and culture.
They should strike a balance between being too distant and smothering you. A positive investor relationship is more powerful than an apathetic, distant one or a negative one.
In conclusion, Look for someone who will give you the money you need as well as constructive feedback on business decisions.
Narrow down your potential investors with initial screening
There are thousands of investors out there. You can’t reach out to all of them, and of course, that doesn’t make sense either.
A few months before you're looking to raise funds, make a shortlist of about 60 potential investors. To increase your chances of success, find investors who have invested:
- In your target industry and sector.
Tip: Check the investor’s website or profiles on TechCrunch or Crunchbase. - In your company’s investment stage. For example, if you’re raising a seed round, your investors should be looking to invest in seed-stage start-ups.
- In your geographic region, so you know they’re willing to travel to you.
- Amounts near what you’re targeting in your fundraising plan.
If possible, find out what percentage of ownership your potential angel investor or investment firm has taken in previous investments. Determine if the returns they're looking for is an amount you’re comfortable with and whether that fits your own investment goals.
You also want to evaluate the firm’s or angel investor’s track records of successful investments. Check their gross internal rate of return (IRR) for a good indication of previous successes.
How to choose an investor?
In the previous section, you’ve learned how to create a shortlist of investors. Now, we will explain what to look for in an angel investor or VC partner.
- Do they have industry experience?
- Does their skillset complement yours?
- How much time is the investor willing to commit to your business?
- Do they have the right professional network for my business?
- Will you get along with them?
- How do they deal with failure?
1. Do they have industry experience?
Look for an investor who is comfortable with your industry and has experience in an area relevant to your business.
Evaluate if they have previous experience with start-ups, and are willing to invest their time and skills with you besides providing capital.
2. Does their skillset complement yours?
Your investor will become an unofficial part of your team, so their skills matter. Consider the following questions to help you evaluate their skillset.
- Have they run a business before? If yes, what happened to it? Did it exit successfully or fail?
- What did they specialise in before they became an investor?
- How involved have they been in operations?
- Did they advise start-ups before, and in what capacity?
3. How much time is the investor willing to commit to your business?
It’s vital to find out how you and your prospective investor will work together.
Watch closely how they communicate and whether it matches your preferred communication styles.
You'll also need to know their general availability for you to ask questions and get their feedback or advice. Confirm this availability during your investor conversations.
Some questions you can ask to evaluate the level of communication expected between both parties
- How many other company boards are you serving on?
- How frequently do you wish us to communicate?
- How often do you expect company updates from me? What do you need information on?
(Tip: your company updates should have your current top three priorities, account balances, updates on latest KPIs, challenges faced and key achievements.)
- Who sets up our regular meetings? Can I come to you if I have questions?
Note: You’re expected to initiate meetings and proactively ask for help from your investor whenever possible. Don’t be afraid to lead the relationship, but always align on expectations with your investors first.
4. Do they have the right professional network for my business?
Investors come with their brand image and a list of professional contacts. Their brand image can help you with press coverage, talent recruiting and company reputation.
Search their portfolios for potential companies you may work with to find talent and other advisors. The proper connection at the right time can help you strengthen your business.
How to evaluate an investor’s professional network?
- How extensive is the investor's network?
- Where is the investor’s network located? Are these regions I’m considering growing into?
- What industry are the contacts based in?
- How may they be able to help me?
5. Will you get along with them?
We've focused a lot on your investor's paper credentials and commitments, but the following two 'softer' points are perhaps the most critical.
Ask yourself if this is someone you feel you can respect and trust. Remember, you're going to spend lots of time with this investor in high-stress situations, so it’s crucial they respond positively to you as a person.
Having someone you can rely on and converse with openly in stressful situations is the difference between weathering the storm or crumbling under pressure.
Spend some time getting to know your future investor in a casual setting and ask yourself if you like what you hear.
If you’re unsure, try the classic airport test: “Would I want to be stuck in an airport with this person?”
“Trust your gut and move on if you don't feel like you've made a personal connection with an investor in the first conversation. In the past, I’ve spent too much time with investors who did not feel quite right and they eventually opted out. That was predictable and I shouldn’t have wasted my time in follow-on conversations. Be confident in your ability to raise and move on”
- Mike Myer, Founder and CEO of Quiq
6. How do they deal with failure?
Finally, you want to know how your potential partner responds to failure and less-than-ideal situations.
When your investor has made an offer, and you're deciding who best to work with, ask them about previous investment decisions. You want to know about those that went well and decisions that didn’t go according to plan.
Ask your investor to share the names and contact information of these founders. Not only will it help you make better-informed decisions, but it's also a strong demonstration of your process when making strategic business decisions.
Ask for a comprehensive reference check
1. Ask investors if it’s okay for you to do a reference check on them
How they respond to this question already gives you a lot of information. If they react badly, it's a sign they either don't trust you or have a big ego. Investors who welcome this have nothing to hide.
2. Ask for references from less successful founders
You'll learn how your investor responds when things don't go well. You'll also want to know how they react to disagreements and how helpful they were to resolve these challenges.
3. Call up some founders who aren’t on the list of references
References are often curated to give you a positive response. Balance these out by checking with people in your network to see what they have to say about your potential investor.
How to conduct an investor reference call
Your goal is to find out how the founder and the investor have worked together. Ask questions to gauge their working style, how they prepare for a board meeting and how they interact with the team. You can also ask whether they would work with the investor again in the future.
Further reading: K9 Ventures investor Manu Kumar’s comprehensive list of favourite questions to ask during an investor reference call.
Choosing the right investor takes time
Finding the proper investor is a careful balance of research and open communication. Just like your investor will evaluate if your company is a sound investment decision, it’s up to you to ensure that they’re also the right fit for your business.
Don’t rush things as you’ll be working together for many years.
Frequently Asked Questions
