From crowdfunding to convertible debt, angel rounds to an ICO, there are multiple creative ways to fund an early stage startup.
While some startup founders subscribe to the spray and pray technique to get a deck in front of as many investors as possible, the reality is you are not a match for all investors. But, neither are all of them the best fit for you.
Just like your own innovative product or service, investors have key points of differentiation, too. Each investor, whether an individual angel, seed fund, accelerator lab or VC firm should have a unique investing proposition.
By establishing your own criteria and creating a profile of your ideal funding partner, you can screen against an investor’s proposition to determine whether it’s a good fit for your company. This method ensures you don’t waste your valuable time, nor an investor’s.
As an added bonus, if you can demonstrate how well you understand an investor’s proposition, it’s much easier for them to imagine how successfully you might connect with your target market.
Consider these points to develop a profile of your ideal investor:
- Funding specs. This is the most basic of the screening criteria. What size investment do you seek? Be realistic about the amount you need (at this moment) and how you plan to use it to hit specific milestones. What’s your potential funder’s sweet spot, and do you fit within it? This may include geographic location, as well.
- Terms. Before you start approaching potential investors, you should have a rough idea—always subject to negotiation, but a good starting point—of the terms you’d consider accepting. Talk to an advisor to flesh this out. You should spend some significant effort weighing your possibilities, which may save time later during negotiations. Start with a gut check. How much of the company are you willing to give up?
In addition, consider other issues that are important to you and non-negotiable. For example, one woman-led startup advocated for a special clause in her funding agreement. In the event of alleged sexual harassment of the founder by an investor, the VC would replace its board representation.
- Industry experience. How important is it that your investor know and understand your technology or business? This may be more important to startups with highly specialized technology or intellectual property. A knowledgeable angel or seed investor can prove immensely valuable if s/he offers industry connections and introductions for business development and growth. Look for the investor’s value-add.
- Level of involvement. Consider to what degree of decision making you want your new investment partner involved. Many investors require a board position or advisory role. Ask your potential investor if s/he also will function as a de facto ambassador for you in the market, when possible.
- Values and priorities. Think more broadly than a return on investment. Assess the investor’s level of patience, comfort with new markets and attention span. How many portfolio companies does s/he monitor at a given time? How much support will you receive, if you need it? Does s/he encourage synergies within the portfolio?
- Personality. It’s the people, not just the capital. You will be working very closely with your investors as another partner. Do you trust them, and feel comfortable? Can you picture how it would be to communicate bad news?
- Past performance. Run a “where are they now?” lookback on their prior investments. Ask potential investors what they learned from the successes and the failures. What’s their rate of success in catapulting funded companies to the next round?
- Expectations. Make sure you understand their goals for your company. This might take the form of certain performance metrics. Find out what they expect from you, personally, as the founder.
As one angel investor recently commented, “Our time is an even greater resource than our money.” Entrepreneurs know well this challenge of time management, too.
Creating a profile of your ideal investor helps keep you focused and efficient during the fundraising process. Revisit the target profile as you and your company evolve.