Real life isn’t like Dragon’s Den or Shark Tank, where the one with the money always makes the call. In truth, a start-up’s choice of investor is just as important as an investor’s choice of start-up.
What then should a start-up look for in the ideal investor?
An investor is far more than the money they bring to the table (although that is a very important part of the package.) Often the best investors won’t think of themselves as financiers of your operation, but as partners in it.
By understanding your own situation, you’ll be well on the way to understanding the type of investor that will offer the greatest upside. To that end, there are three key considerations to be made by any investor-seeking start-up.
What stage is your business at? How much funding do you need at this point? At the early stages you may only need one-hundred thousand dollars, and may source it from your own network. As you grow you might target angel investors, or even king-making venture capitalists.
No matter the stage your start-up is at or what your potential investors look like, the same initial vetting applies:
- How strong is the investor’s financial position?
- Do they have the ability to meet your funding requirements?
- When was the last time they funded a start-up?
- How have their previous investments performed?
- Do they have a reputation for repeat rounds of investment?
Resources like CB Insights and Crunchbase can really help you with this homework.
Does the potential investor have relevant experience in your industry/specific field? Do they align with your purpose and values? Money aside, do they bring skills, experience and networks that your business needs to take the next step?
Investors, particularly angel investors, venture capitalists, may seek to wield more power over your start-up than you are comfortable with. They will likely have a spot on your board, and have the power to make decisions on brand, office, culture and direction. If you choose an individual or firm that doesn’t share your vision, you risk seeing your business go in a direction that you aren’t happy with.
It’s therefore important to someone who gets it – who understands your business in its current form, will provide strategic insights that you hadn’t considered and who is relatable and easy to get on with.
Robert J. Moore, founder of RJMetrics explains: “When we were raising money for RJMetrics, we focused on investors who could step up when they were subject matter experts and yield to others when they weren’t. For me, these are the same kind of people that I enjoy having a beer with after work. This is critical to building a healthy, honest relationship with your investors.”
Ways of working with your investor
Following on from the previous point, you need to be comfortable with the level of control that a potential investor will exert. This is far easier when the investor believes in your purpose and sees your current team as the ones to make it happen. A good investor will want an appropriate amount of say in the direction of the business.
Some start-up founders have discovered ways to avoid relinquishing control altogether. “The larger the investment, the more control you’re going to give up, and the larger the exit needs to be” says Jun Loayza of Passport Peru. “I instead look for opportunities that leverage a skill set or network that I currently don’t have, and I don’t take funding from them until I’m ready to scale the company, at which point I look for an angel investor that is happy to leave my team and I alone.”
Funding your start-up isn’t often like TV – you probably won’t find yourself delivering a two minute elevator pitch in front of cameras and a handful of stony-faced venture capitalists (although you may well be confronted with something similar.) If your start-up has genuine potential, you’ll more likely hold casual discussions with a broad range of investors.
Finding the right one isn’t an exact science, and will rely on a mix of research, cross-examination, personality fit and gut feel. But if you choose wisely, your investor could prove to be your business’s most valuable asset.