How should Founders Choose Investors in Uncertain Times
How to Find the Right Fit.
There is little more important for any startup than choosing the right investor.
From day one, it is only natural for every startup to be consumed by how they will fund their operation, and how they can navigate through the tricky early days of the business, when stable cashflow is yet to be generated.
The long-term relationship between investors and a startup will be of critical importance to its happy and successful functioning.
And this is particularly true in times of emergency, such as the circumstances that we are currently facing, with Sequoia warning founders coronavirus is the black swan of 2020. And divorcing yourself from an investor can be tricky once that initial commitment has been made.
Despite the turbulent market, VCs are sitting on more than $189bn they must deploy in the next few years or return, and European VC investment totalled a record €32.4bn in 2019; increasing from €24.3bn in 2018. Nonetheless, capital remains somewhat scarce, with Fundera showing that only 0.05% of startups raise funding from VCs.
Considering the economic impact of coronavirus, a financial downturn is now looking increasingly probable. During a recession, (which many of the founders raising capital today never experienced), competition for capital is likely to intensify dramatically.
We recommended our portfolio companies to: substantially increase the number of investors that they are attempting to reach, control variable costs limiting burn rate to extend the runway, distinguishing expenses impacting directly revenue and those with a longer-term horizon, and conservatively reflect lower growth assumptions in their business plans.
Also, several governments of the countries in which we operate, promptly implemented relief measures for startups and SMBs and many companies are offering free or highly discounted services in response to the emergency.
The current situation means that fundraising challenges are almost inevitable for startups, which leads to a climate in which it can be seductive to accept any form of financial investment, from any source, regardless of the terms.
But this can be a big mistake. In highly uncertain times, it’s even more important for founders to diligently select a trusted partner, and the best way to achieve this is to assiduously consider the most important factors that will contribute to the success of any investor relationship, and the overall performance of the business.
So in this piece I’m going to examine some of those potential factors, and provide a framework that will help founders choose an appropriate investor.
Influential Investors and Networking Opportunities
This point is quite a straightforward one — investors that are also influencers and have a solid track record in scaling up companies are particularly valuable.
At Pretiosum Ventures, we offer tailored support to our companies, with a specific focus on business development leads and introductions to potential clients, leveraging a team with several decades of investment and entrepreneurial experience.
Any good contact is valuable, but that good contact becomes priceless if they can introduce you to other useful contacts (potential clients/investors/acquirers).
Any investor that comes with a portfolio of connections that they are willing to share with you can be hugely beneficial, so this is definitely an element to take into consideration when engaging in any capital raising efforts.
Similarly, it’s always useful to have investors that are familiar with your industry. The best way to find out about this is simply to engage them in genuine dialogue.
It will help you to gauge their knowledge of your industry, and also provide you with an opportunity to inform them of any potential threats and pitfalls. This will smooth things over, and help with achieving a healthier working relationship, should your business hit any snags.
The bottom line is that investors who don’t understand your market and industry will struggle to appreciate what you’re doing. So make sure that they do!
The Ability to Follow-on
If you’re going to make it as a technology startup, then this will probably require several funding rounds, particularly if you intend to grow your business exponentially over time.
So you need to know that investors are willing to commit for more than just one round, particularly in the early days, as finding new investors at every round will prove to be costly, both financially and logistically.
Appealing to other Investors
Another important facet of any arrangement to consider is whether it will make you more or less attractive to other investors in the future. Again, this facet of early stage investment is very much based on weighing up short-term and long-term factors.
When you’re scrambling around for cash it is only natural to favour the short-term boost of any form of investment. But getting esteemed individuals on board may pay off handsomely in the long-term, usurping the value of another investor.
Early stage investing is all about earning trust and credibility for your company, so do take these factors into consideration.
Communication and Commitment
This is very much a matter of personal taste, as not all startups will necessarily require ongoing communication with investors.
However, founders should be aware that a lack of communication can often result in misunderstanding, and such misunderstandings can soon snowball out of control.
It’s generally advisable to avoid this by engaging investors in comprehensive dialogue before they invest any money, and to establish just how much input they will offer/expect.
Trust and Personal Qualities
The investor-founder relationship can be a complicated one, and can rapidly veer off course if appropriate investors aren’t chosen from the beginning. As a startup founder, you need someone who can trust your vision and invest in your ability to execute that vision.
What you don’t need is someone who wants to take excessive control, or who demands constant input without offering any support.
As a general rule, this means that it’s advisable to avoid those investors who view you as a timely opportunity in the short-term, and instead opt for those who believe in you because of longer term product-market fit fundamentals.
Finally, you should ensure that you can work with the investor on a personal level, as this could be a long-term working relationship, and there is nothing worse than getting together with someone that you clash with!
Most startups are usually tempted to settle for their first investment offer.
That is entirely natural in such a turbulent and competitive market.
But instead of making rushed decisions on potential investors, it pays off to take some time, considering a wide variety of factors, as scaling a startup is a long term game, and trusted partners come in particularly useful in uncertain times, when having someone on your side, willing to support your vision, can play a fundamental role by separating you from the the competition.
This article was originally published by Luca cartechini on medium.
Early-stage investor focusing on FinTech, AI and Future of Work/Life. Previously Equity Associate at Jefferies and Financial Analyst at Bloomberg. Futurist Junkie | Sport Enthusiast | Lived in x5 Countries