Once you have decided to take on third-party investments to help fund your startup, you then need to decide what kind of investors, and then specifically which investors you want to accept funding from. Often founders do not give this piece enough thought. The makeup of your investors is important. Investors can either be a huge asset or a burden to your business. You should try to get to know potential investors before they become investors so that you can try to determine whether they will be a value add or a drain on your business.
Investment Strategies
Before identifying specific investors, it is helpful to first identify what type of investment strategy aligns with your business’s goals. For example, if you have a high growth business, then you will likely want to seek out traditional venture capital investors. If, by contrast, your business is a social impact business or a business that does not plan to grow beyond the local market, then you may want to seek out non-traditional investors or investors that have a long exit horizon. You can often discover an investors investment strategy through a web search of the investors. If the investor does not have a website that sets forth the investor’s investment strategy, then you may be able to tease out an investor’s investment strategy by looking at their past investments. If neither of those options are available to you, then it is worth having a conversation with prospective investors about their investment strategy because it is important that your investors’ investment strategies align with your business’s exit strategy.
Types of Investors
Regardless of the investment strategy that is right for your business, it is typically best to initially find individual investors (i.e., not investment companies) that not only invest capital in your business, but also add value to your business by providing mentoring or strategic advice to you and your team. Individual investors, who are often referred to as angel investors, will typically have a lower barrier to entry than investment companies because angel investors are typically investing their own money and they already have some knowledge of the industry in which they are investing. Investment companies, by contrast, are more conservative in their investment decisions because they are typically investing other people’s money and they owe a fiduciary duty to such people to make reasonably prudent investment decisions. In most cases, this distinction between individual investors and investment companies means that individual investors will require less due diligence prior to making an investment, which means you will have more time to focus on growing your business. This point cannot be overstated, because raising capital from third-party investors can take significant time.
As your business grows, you should have a team that grows with your business. A strong team will make it easier to take on investments from investment companies as your business grows, because your team will be able to share the burden of satisfying the due diligence requirements of investment companies. While a longer lead time is typically required for investment companies, such investment companies can have significant benefits for your business. As with good angel investors, investment companies are often part of a startup ecosystem and they can help businesses find other investors, employment talent, and prospective clients or customers.
Whether dealing with individual angel investors or investment companies, the individual personalities of the people making the investment decisions will also have a big impact on what type of partner you are getting when your business accepts their investment. Before closing on the investment, it is important to at least make sure you understand the general personality type of each investor, so that you can effectively communicate and work with that investor going forward. If possible, it is best practice to avoid accepting investments from investors that have personalities you cannot work with. In their book, “Venture Deals: Be Smarter than Your Lawyer and Venture Capitalist,” Brad Feld and Jason Mendelson, try to identify the most common archetypes of personalities you are likely to run into among investors. While there are additional types of personalities that you will encounter, Brad Feld and Jason Mendelson’s list is pretty thorough, and they do an amazing job of highlighting what kind of negation techniques may work better with different personality types and certain personality types to flat out avoid if possible. The main point is to know what kind of personalities you are dealing with and plan accordingly.
Build a Bench of Investors
No matter how much diligence you do on prospective investors, it is never possible to predict how any one investor will act in the future because an investor’s situation changes over time (e.g., they could be flush with cash now, but not in the future; they could have had success in the past because they invested in a specific industry, but be struggling in a different industry; etc.). You can mitigate the impact of changes in the situations of specific investors by diversifying your investor pool. As most founders know, it is not necessarily good to have a lot of investors because then you must keep each of those investors informed on the state of the business and may have to get their consent before the business takes certain actions (e.g., agreeing to sell the business, issuing new equity interests in the business, etc.). It is less well known that it is also not good to have too few investors. The old saying “do not put all your eggs in one basket” is true here. Initially, it can be beneficial to have two to three investors and then build from there depending on the capital needs of the business, because different investors will have varying strengths and weaknesses. Especially early on, it is helpful to have a small group of investors to turn to for advice on questions relating to the business. The investors will likely be happy to provide whatever advice they can because they want to protect their investment in the business.
In addition to having a solid bench of investors, you should also actively work to build and maintain a solid bench of prospective investors. There may come a point in your business’s growth where existing investors are tapped out. When that occurs, it is helpful to have a bench of prospective investors who are familiar with your business that may be interested in making an investment in your company.
Where to Meet Investors
Now that you have a better idea of what to look for in an investor, you may be wondering, “where do I find investors?” The easiest way to raise capital from third-parties is to approach people you already know. If people in your circle have money and their investment strategy and personality is a good fit for your business, then you may be able to complete an initial financing without needing to venture outside of your circle. In most cases, however, founders need to venture outside their circle to raise the money they need to get their business off of the ground. If that is the case, then the key is to get out there and start meeting people. You can do this by attending networking opportunities in your geographic area. These networking opportunities are nice because everyone is there for the same reason, and you can use them as a place to practice pitching your business.
