17 of the Most Important Criteria to Getting Startup Investment From Smart Money
How to Get Funding for Your Startup Using Ideal Investor Profiles
So many entrepreneurs rush the startup fundraising process. Even the most senior people seem to think it happens faster than it really does. And so they have this sense of urgency both from a “we’re running out of time” perspective and a “we have something great, this will be quick” rationale.
But rushing the process is not one of the ways to raise startup funding. And I can’t stress enough how important it is to establish a solid foundation in your startup fundraising strategy. You have to trust the process.
At the start of that process is what every sales person knows as profiling and qualifying. Profiling your investor will save you a ton of time and headache from speaking to the wrong people.
I’m sure if you’ve tried raising capital for your startup, you’ve experienced “ghosting,” whereby an investor doesn’t follow-up with you or respond to your messages. Much of the time, ghosting happens because you talked to the wrong person about funding your startup.
To help with that, I’ve provided a list of criteria you can use to profile your investors before you speak with them and qualify your investors while you have them engaged.
1 — Prior experience operating similar startups
Entrepreneurs want to ensure they work with people who’ve had some experience running similar business models or have taken similar technologies to market.
For instance, if you have hardware that requires enterprise sales, it might not be the best bet to find a co-founder, partner, or investor with only consumer software experience. If you can only afford bringing on a limited number of people, then being picky isn’t actually a luxury; it’s a necessity.
2 — Prior experience investing in similar startups
The role of an investor is to help the entrepreneur, particularly the CEO, think from a strategic level. It’s very easy for a founder to get caught up in the weeds of the business operations. So, finding someone who can say “hey, take a step back and look at what these activities are doing to your ability to achieve the bigger mission.”
This type of investor should understand the vitals of your business by assessing the financials, operations, and a founder’s behavior.
3 — Prior experience exiting startups
An entrepreneur shouldn’t be raising capital for a startup if he doesn’t plan to liquidate, or help his investors liquidate. With that, there are several options to exit the business, the most common being an acquisition.
Find an investor who has operated and/or invested in companies that are similar to yours and have sold to buyers that match yours. It will help your startup reach that successful outcome more efficiently.
4 — Prior experience in your technology sector
An investor can connect you with the right technical team, partners, and resources. More importantly, a seasoned investor in your technology sector can help you refine the best value proposition for prospective or current customers.
This is a talent many entrepreneurs have to gain as they build their startup. So, an investor who can guide that process can teach entrepreneurs how while ensuring the business achieves the best growth potential.
5 — Prior experience in a startup’s target market
There are nuances in every market. The government is famous for having acronyms only insiders can remember. E-commerce is being swarmed by kids who want side hustles. Each market has different drivers and players.
Each customer has different challenges and needs. Having an investor who can help you determine those needs is great. Having an investor who already has experience and connections with those customers is even better.
6 — A focus on investments in your geography
Many investors prefer to invest in companies that are headquartered nearby. Meaning, if the VC is in Silicon Valley, it might prefer companies that are physically in Silicon Valley. This isn’t always the case, especially in such a smaller and more interconnected world.
But it would suck to pursue an investor only to eventually get rejected for something you could have quickly researched ahead of time. Also, it doesn’t really look good on you as the entrepreneur if that information was easily accessible on the VC’s website.
7 — Complementary portfolio companies
Entrepreneurs underutilize a VC’s portfolio. They consistently miss the opportunity to learn and connect. You don’t want to pitch an investor who’s part of your competitor’s board. You shouldn’t approach an investor directly if you have or can create a relationship with a CEO in his portfolio first (and get the warm intro later).
Imagine the impression it makes on the investor to know you’re already partnered and have aligned with one of his portfolio companies. It shows potential growth for his investment and shines a positive light on you for being favored by his startup.
8 — Dry powder schedule
You can use tools like FounderSuite, Crunchbase, and Pitchbook to find how much money an investor has to work with and if he’s investing any time soon. What you’re looking for is whether your startup is at a stage the investor usually gets involved.
So if you’re raising a $10m round, consider talking to VCs who get involved at an earlier stage of a company (not seed, but still early in terms of VC money). To quantify, that VC will need a $100m budget (fund size). It helps to know if the VC has raised in the last few months (maybe from a press release).
9 — Deal Requirements (metrics, stage)
Ask an investor what they’re looking for in an investment, and he usually responds with something like:
“They have to show some kind of traction and a management team with proven abilities to create a business around the product.”
This quote is alluding to an earlier stage company that has a product and some users, if not already revenue. It’s saying it wants, at a minimum, entrepreneurs with business backgrounds and financial literacy.
But the quote isn’t clear to a lot of early stage entrepreneurs, so it’s important that you ask for quantifiable baselines, such as revenue, financial metrics, and operational stages.
10 — Minimum Ownership Requirements
Venture capitalists get a bad reputation, being called “vulture capitalists” for taking over a company’s board and controlling the company’s strategic direction. Much of this is because the companies VCs invest in lack the leadership to execute a solid business strategy. It isn’t an ego issue, it’s a capability one.
But whether you have a positive or negative view of investors, you can manage the relationship better if you know what role they want to play in advance. Ask them what percentage they’re looking for and what board seats (or officer role if any) they want. There are more criteria than these two, but these two are fundamental to your understanding the relationship you’ll have.
11 — Alignment on culture (DNA and value system)
This is by far the most important area of alignment, in my personal opinion. So many of the business issues can be resolved if the team can work cohesively and amicably. And on the flip side, so many unnecessary issues arise as a result of conflict with co-founders and friction with investors.
The way to create cultural alignment is to first define your values and principles. Then at least you have something you can agree or disagree on. Understand that you’re interviewing everyone, including investors, just as they’re assessing you too. So, again, being picky isn’t a luxury, it’s a necessity.
12 — Alignment on the “unwritten rule”
The unwritten rule is as I personally understand it is that an entrepreneur will work to increase the value of the company’s shares while working toward a liquidity event. So this is an understanding between the investor and entrepreneur, but I believe it should be spoken.
I believe both should agree on a growth strategy and the exit plan — if an acquisition, then when, who, and how much you sell for.
A good way to gauge this is by check size: if an investor throws down $5m, then expect to achieve at least a $50m exit (generalization but the idea is to ensure a certain multiple at exit).
13 — Aligned on business objectives and strategy
Investors will ask you for this when looking at your pitch deck, executive summary, and financial statements. They want to understand your thought process on the things that drive your business growth, and which ones you prioritize more highly. I believe you should be looking to seasoned investors (who preferably ran startups before) to guide you through this process.
The reason goes beyond just saying “we agree to accomplish these goals,” but toward building a solid working relationship. Meaning, if you ask for and receive guidance, you can test the waters and prove that you have qualities to learn, listen, and adjust.
14 — Aligned incentives with organization’s interest
You want to know that everyone puts priority on the organization’s growth over their own personal gain — that they understand personal gain comes from the organization’s success.
But if you hear about a VC that tends to act in the best interest of his own VC more than he does in the new startup’s growth, then you might want to stay away. Same goes for founders: if they act in their own personal best interest (taking higher salaries, more shares, better terms in the agreements) then they could be jeopardizing the success of the startup and other employees.
The way to best assess this is seeing what terms in your agreement the investor emphasizes. Be compassionate to the reason behind their ask, however. They might have just gotten burned or feel pressure from the firm to perform, and you can help them address that challenge while alleviating their concerns.
15 — Built relationships with other board members and management
Another indication that an investor has the new startup’s best interest at heart is how he establishes relationships with the other board members. The relationships are important to have because you can maintain alignment on strategy, culture, and expectations so it’s easier to agree on future decisions. But what I’m referring to is deeper. Make sure everyone understands each other’s roles on the board. Make sure they all accept their fiduciary responsibilities to the organization and each other, not to their VC’s or own financial gain.
16 — Truly shows interest and engages with you
It’s hard to build and manage relationships with investors because they’re so busy. It feels like you’re chasing someone who prefers to neglect or “ghost” you. How do you know it’s real engagement when it seems they’re analyzing you and want to spend actual time with you? Usually, you feel like they’re aimlessly wasting your time.
In both these situations, you can determine an investor’s level of interest by pressing him for a yes or no response. Entrepreneurs have to be hungry and apply pressure to sell their startups to investors.
Too many of entrepreneurs incorrectly correlate respect with silence: “if I press too hard, I’ll piss them off because they feel like it’s a waste of time.” Quite the contrary. You’re still proving that you’re worth the time, and that your startup is worth the investment. That doesn’t happen with one phone call.
17 — Has the authority to make a decision
This one refers more to venture capital firms and funds that have multiple investors. Many larger investment firms have associates who vet deals. They’re the gatekeepers. You want to get past them with etiquette.
They know the kinds of investments the decision-makers have asked for, but they don’t have final say in the investment. So, figure out who’s the active investor, and see if another CEO in the portfolio can introduce the investor directly.