Raising money is probably the most critical, and challenging task of a startup founder. Many entrepreneurs view it as a necessary evil. That’s probably why crowdfunding was formed. And while for some startups crowdfunding is sufficient, for most startups it’s not yet relevant. Therefore, founders still need to raise money from startup investors.
Unfortunately, many entrepreneurs struggle with this. In particular, this is true for first-time founders. It has to do with their lack of experience, but also with a wrong approach. Raising money from startup investors is, in fact, a marketing and sales process. And, it should be approached as such. As Mark Suster defines it: “Your company is the product and you’re selling an equity ownership in your company”.
Therefore, simply put, the same principles and methods that apply to selling your product, need to be applied to raising money for your company. So let’s go over some of the basic concepts and tips of raising money from startup investors. They will improve your fundraising skills and increase your chances of funding your company.
Raising Money is a Process, Not an Event
First of all, founders need to understand that fundraising is not a once in 18 months event but a year-round process. You can’t expect to simply show up three months before you run out of cash and convince an investor to “buy” your offering. An investor is a customer with a fixed amount of money to spend on a limited number of startups. She will naturally prefer to invest in someone she knows, trusts, and feels comfortable with. In other words, you need to build a relationship.
Furthermore, you are also selling yourself. You need to invest the time and energy to build trust, establish credibility, and even create personal chemistry.
The investor first has to “buy you” before he will even consider “buying” your idea (as great as it may be). And like with any personal relationship, not everyone has the same taste. So, don’t be offended or discouraged if not everyone “likes you”. You only need a few good startup investors to fund your company.
Hence, the first step is to identify who are the right startup investors for your company. Much like selling a product, not every potential customer, is the right target customer. The same goes for investors. Not every investor is a good match for your company.
You need to look for a good fit across several factors. Including, industry/technology fit, investment amount, and stage. Also, in early-stage investments, i.e. pre-seed or seed rounds, where private investors are involved, an emotional connection can be a strong motivation to invest. For example, in one of my startup companies, we developed a breakthrough sound technology that had the potential to replace hearing aids. That idea resonated very strongly with a couple of private investors who are hearing impaired.
So with all that in mind, here is my proposed process for developing and applying your list of target investors.
1. Create an initial list
While it may seem obvious to some, I still think it’s worth noting, there is no point in taking the entire list of startup investors within a 100-mile radius of your location. Contacting a totally irrelevant investor is not just a waste of your time and theirs. It also shows a lack of planning and poor professionalism. This could tarnish your reputation, not just with this particular investor, but with his peers as well. Consequently, that could hurt your chances of raising money from them in the future.
Hence, create your initial list using the following criteria:
- Stage – If you are raising seed funding, there is no point in talking to VCs who are only investing in A round and beyond. List only those who you know, or think, that focus on early-stage investments.
- Investment amount – Every investor has a range of investment amount she or they typically invest in a round. Some private investors cannot go beyond $250k, whereas others can invest as high as $2M. Similarly, smaller VC funds prefer to invest $2-5M per company, while large VC funds prefer $10-20M. Choose those investors that fit the amount of money you are looking to raise.
- Industry/Technology focus – Some investors have specific areas of interest. For example, some VCs focus solely on cybersecurity, while others focus on AI or autonomous cars. Likewise, private investors also have their comfort zones. It may depend on their career backgrounds or previous investments. Try to identify which investors may have a strong interest in your target market/industry or technology sector. In case you don’t know, leave it as a question to validate as soon as possible.
Your list should include all the pertinent information regarding each investor, such as:
- Investor (person)
- Who knows them? Who can connect you?
- Typical investment stage
- Typical investment amount
- Next Steps
2. Rank the list based on your initial assessment
Next, it’s important to rank the list according to your priorities. For example, you can divide your list to priorities A, B, and C. The A’s should be the people who would be the perfect investor for you, and also those that you have the highest probability of closing.
It is not your “wish list”. So if you really want Sequoia Capital as an investor, but you know that you’re not really a good fit for them then they shouldn’t be on your list. Essentially A is a combination of “most desired” and “most likely to close.”
The B’s are your next preferred, or those less likely to close. And finally, C’s are all the rest.
3. Qualify and validate
At this stage, all you have is a list of prospects or investment leads. In addition, it includes quite a few “guesses” and holes. Now you need to qualify these leads and validate your assumptions. Like a sales funnel, you need to convert leads into real investment deals or take them off your list.
You need to do some research. Find out which of your contacts are able and willing to connect you with each investor on your list. They are a valuable asset. Learn from them as much as you can about the people you want to meet.
As already pointed out, startup investors tend to invest in founders they feel they can trust, and even like. It’s a personal connection. We, humans, tend to trust other humans with whom we have something in common. For example, we grew up in the same town or neighborhood, went to the same schools, served in the same military unit, share the same hobby, etc. Therefore, it’s a great advantage if you can make such a personal connection with your target investors.
To do so, you must first research them. Which schools did they go to? What companies have they worked in? Learn about their backgrounds, areas of interests, hobbies, favorite charities, shared connections or friends. Any one of these can help you make a more personal connection that will enable you to win the investor’s trust. This will also make them feel comfortable with you.
In addition, it’s important to validate your assumptions on the stage they invest in, as well as their typical check amount. Furthermore, you need to know if they have invested in any companies in your space before. And if so, which companies and how did it work out for them?
Consequently, after gathering all this information, you can go back and update your list.
4. Update and revise
Now that you have collected all this information, validated your assumptions, and qualified your target investors, it’s time to update the list.
You can remove those who are no longer relevant to your company. Also, you can revise your ranking based on the new information that you have. An investor who was ranked as an A might be downgraded to B, and vice versa.
While you qualify your list of investors, you might come across new leads. Other prospective investors that may be a good fit for you. You should add them to your list and qualify them as well.
Also, it’s important to identify what questions are still open and require further research. Furthermore, there are cases where you may need to develop new contacts in order to reach some investors on your list. These tasks now become part of your action plan.
Once you have a list of investors to target, you can develop a detailed action plan to sell your investment proposal. This too is very similar to the action plan an effective salesperson would use to sell his product. You also need to have a process to track the execution of your plan and revise it if needed, until you achieve your funding goals.
Armed with a good list of startup investors, a detailed action plan, and great execution you will dramatically increase your chances of raising the money you need.
One thought on “How to Select Your Startup Investors”
Wow, great post. Really looking forward to read more. Keep writing. Jeanine Welbie An