If you’re fortunate, you may find yourself with multiple investor offers. Don’t be hasty, though. Once you choose an investor, they’ll be with you for a while. It’s important to choose wisely. The right investor can assist your company on the way to success, but the wrong investor can make the whole venture go down in flames.
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What should I be looking for in an investor?
Know exactly what you want from an investor before you start to look. Write your goals into your pitch, but also have a private checklist of your expectations. Remember, you’re not the only one with a pitch! An investor/startup relationship goes both ways.Aside from the actual amount you need to fundraise, here are a few things to keep an eye out for.
Level of involvement
Do you want an investor who is with you every step of the way? Do you want someone who sits back and lets you take charge? Decide early on your expectations for your relationship with your investor. This goes beyond a dollar amount.Make sure your expectations for investors are very clear. This applies to even friends or family who may spot you a few dollars for your startup.
Background
Do you want an investor with a speciality in your field? Is previous knowledge or expertise in your product’s field necessary for investment? This goes back to the question about the level of involvement you expect. If you expect a high level of investor involvement in your product, you’re going to want someone who knows about the product type.Ask for references, and do your own research.
Network
An investor's network can be useful especially if your product is specialized in a specific field. For instance, if you're into manufacturing, having an investor with an extensive network of manufacturing startups, suppliers, and evangelists can be helpful for you.Does the investor have the ability to fund?
Don’t waste your time pitching to a potential investor who doesn’t have the funds you need. Do your research before you even pitch your startup. An investor who is under financial stress will put stress on your startup as well. |
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What is their investment history?
Have they invested recently?
No sign of recent investments is a red flag! This may mean they are likely to fund additional startups or are inactive for other reasons. Save your time and effort on investors that are focused on startups similar to you. This will build your chances of raising funds.Do they fund repeat rounds regularly?
Finding a new investor for every round of your business is time-consuming and stressful! Look at a potential investor’s history. Do they have a reputation for sticking with a startup and funding repeat rounds?Do they have potential as a lead investor?
Once you have a lead investor in place, other investors will follow. The lead investor is kind of like your golden ticket! Finding a suitable lead investor should be the first priority. They can bring follow-on investors.How much industry influence does the investor have?
Appeal to other investors
If an investor has a solid place among their peers, the peers may follow their lead. Look for someone who is seen as a thought leader or evangelist in their space.Reputation
What is their industry reputation? You need an investor who is respected in their field. Funds have credibility given their success in their investments. Look for track records of partners are these funds. |
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Is the investor a good fit?
This investor will be on your board. Their name, actions, and reputation will be joined with yours in the public eye. Is this someone who is a good representative for your company? Is this someone you view as a good person?Do you get along with them?
Don’t discount personal rapport! You will be working closely with your board. This relationship will be a lot easier if you actually like each other.
How much do they want to control?
Will, they let you take the reins of your company, or want a say in every decision? You need to decide ahead on terms for investment ahead of time.Do they believe in you and your company?
Find someone who wants to make your dream happen! You don’t want a naysayer who will sabotage your startup and does not believe in your vision and action plan.Do they agree with your vision for the company?
Share your goals, and the steps to make those goals happen. If the investor is on board with every step, they may be a good fit for your business.What happens when the investment ends?
Come up with a plan, and an end game ahead of time. Include all this information in your term sheet.What are other initial ways to raise funds?
Crowdfunding
Crowdfunding through sites like Kickstarter, GoFundMe, or Indiegogo, are an easy, low-risk way to raise funds. While this may seem like a small effort, companies have actually raised some serious funds through these channels!Friends and family
At the beginning of your startup, friends and family may also contribute to your funds. Be very careful about accepting cash from friends and family! This can cause tension in your personal relationships.Bootstrapping
Bootstrapping is usually the initial phase of a startup in which you are the investor. You have a new idea and are willing to dip into your own funds to make it happen. Unless you have a lot of funds, this phase will usually come to an end when your money (budget for your startup) runs out.By using your own money initially, you safeguard yourself from debt if your idea does not succeed. You also have full control of the company at this point. Bootstrapping can be helpful in having conviction in your business. If you expect outside investors to invest in your startup, are you willing to bet your savings on it?
Angel investors
An angel investor is a person with a high net worth who invests in startups and small companies. Since an angel investor is an individual instead of a company or a firm, their investment amount may be small.Microloans
The U.S. Small Business Association has set up connections with lenders and businesses for small loans. The limit on these loans is $50,000, but they usually average between $12,000-$13,000. These types of loans are perfect for initial seed money for a startup. |
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Final Thoughts
It is important to weigh all the possibilities when considering a potential investor! After all, you’re going to be working closely together for years! Don’t be afraid to be picky! Choosing the right investor can make your company, but the wrong choice can be disastrous. A wise choice of investor can get your startup on the path to success!
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References
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Early-stage funding: Pre-seed, seed, and beyond. (2021, February 24). Retrieved March 05, 2021, from https://www.abstractops.com/blog/early-stage-funding
Engel, A. (2015, October 15). More than money: 4 tips to find the right investor for your startup. Retrieved March 05, 2021, from https://www.entrepreneur.com/article/250895
How to choose an investor:. (n.d.). Retrieved March 05, 2021, from https://www.ycombinator.com/library/2C-how-to-choose-an-investor
Lewis, T. (2019, December 11). Startup investment Guide: 10 steps to assess whether a venture is suitable for investment. Retrieved March 05, 2021, from https://www.boardofinnovation.com/blog/startup-investment-guide-10-steps-to-assess-whether-a-venture-is-suitable-for-investment/
Luenendonk, M. (2019, September 23). An analytical framework for choosing the right investor. Retrieved March 05, 2021, from https://www.cleverism.com/analytical-framework-choosing-right-investor/
Stephan, D. (2018, October 17). How to find the right investors to fund your startup. Retrieved March 05, 2021, from https://about.crunchbase.com/blog/investors-for-startup/