5 Things Founders Should Look for in Investors
Whilst a startup is bootstrapping, the capital to keep going can come from anywhere, including personal loans and close family. However, as the startup develops and becomes more viable, founders may want to be more careful about where the capital is coming from, and may start to consider investors. But who?
With professional investors, the final terms of the can sometimes result in founders giving away more than they might have wanted. This guide can help founders look out for the qualities of investors that can help propel their business not just to the next fundraising round, but way beyond that.
Looking for investors for business
Investors in startups come in different forms, angel investors and venture capitalists. These two types of investors have different investment goals and take a different view on what acceptable risk means to them.
Angel Investors: These are typically high net worth individuals that almost exclusively fund startups and entrepreneurs. Angel investors are sometimes former founders themselves and have the personal experience necessary to help startups navigate the early days of product development and scaling.
Angel investors can take a special interest in startups operating in their area of expertise, or in a particular geographical region. They may also be someone connected to the founder who has the resources available to inject capital but who has no previous investing experience.
Typically speaking, angel investors are looking for a higher rate of return in exchange for their money. Due to the high risk of investments not being profitable at all, angel investors usually have a large and diverse portfolio. Angel investors are looking to help a startup make the first steps in their growth journey. They may be more concerned initially with the competence and expertise of the founding team, than the business model of the startup.
Venture Capitalists: These are investors that inject capital into a business in return for an equity stake. Venture capital investors will look for opportunities with very high growth potential. They’re usually limited partnerships in which the partners invest into, creating a fund that’s managed by a committee that makes the investment decisions.
A venture capital fund would try to identify a startup with a strong leadership team and a product or other opportunity that could easily be scaled. They may try to obtain a large enough equity stake to influence the company and help direct the management team.
The risks involved in immature and unproven companies can result in high levels of failure. In return for this risk, venture capitalists expect to earn a massive return on their investment should the startup be successful.
Qualities of a good investor
Fundraising is arduous and founders can be overwhelmed when it comes to managing a fundraising round. The combination of the stress involved and the need for investment to maintain the viability of the startup can mean it’s tempting to accept any offer on any terms.
However, not all capital is equal. The backing of investors is more than just financial and thinking of it in these terms can be opportunity limiting. The different abilities and experiences of an investor can be a force multiplier when it comes to investment. Bringing the right person on board can make the difference between long term success and short term failure.
Investors will likely negotiate the ability to have a meaningful say in the direction of the business in return for their capital. This strategic input means that the right investor relationships can drive success and innovation, as long as you know what to look out for.
1. Think exit before an entrance
It’s one thing to have a vision for a startup and to be able to sell that to an investor, but you still need to agree on how to get there. An investor might have a completely different view on how to achieve the startup’s growth milestones.
Discussing things before an investment relationship is established can be better in the long run, ensuring that goals and strategies are fully aligned. Here’s some questions that you can expect:
What is the growth plan for the startup?
What does the startup need to achieve to carry out its next fundraising round?
How will the startup spend the capital raised in this round?
What does a successful exit look like?
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2. Industry expertise
When considering an investor, it’s worth thinking about where they come from and what their industry background is. This industry expertise (or lack of it) may be guiding and influencing the direction of your business, so understanding the relevance of an investor’s experiences is key. Ideally, investors would have a deep and personal knowledge of the industry that the startup currently operates in, or will be in the future.
Investors with relevant industry expertise can provide insight and experience to help navigate the marketplace and leverage opportunities whilst avoiding common mistakes.
3. Foundational expertise
Beyond some experience of the industry your startup operates in, investors may also have some proficiency in the skills associated with entrepreneurship. It may be one thing to find an investor with industry knowledge, but it’s another thing when your investor has personal experience of scaling their own startup, or has very specific financial or operational experience from previous roles, such as in analytics.
As an investor will carry out due diligence on an investment, the same is true for founders looking at investors. After discussing their background and thoughts on the growth plan, you can investigate and interrogate this information. Digging into their background and speaking to mutual connections within your professional network can help uncover the real value (or lack of) that an investor might add to a startup.
By looking at the investor’s network, you can also help establish how this person might guide your startup. It can also indicate the types of experience your startup might be able to call upon in future, as the investor's network should be available to you for mentorship and operational help.
5. Is the investor…invested?
How is the investor approaching the fundraising round and the meetings with the founding team? The attitude of this approach can tell you a lot.
Have they done their research? Do they know the startup’s growth journey so far? If they do, even at this stage they may have important insights into the growth plan. They may be able to discuss how they can leverage their skills and capital to provide added value to you and your team.
A good quality investor in your business should be able to help seize market opportunities whilst also providing a fair challenge to the growth plan, ensuring that decisions are scrutinised and based on quality assumptions.
This is not an easy balance to strike. Still, a high quality investor, with relevant experience and that has completed their due diligence, will be able to communicate this during fundraising meetings.
There’s much more at stake than capital when it comes to finding the right investor. Although forming a relationship with the wrong investor might not be terminal for your startup, it might be a handbrake to your success and could put off high quality investors being interested in the future.
This is why it’s always worth taking the time to ensure you build relationships with the right people.
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