Welcome to a BetaKit weekly series designed to help startups and entrepreneurs. Each week, investors Roger Chabra and Katherine Hague tackle the tough questions facing founders today. Have a question you would like answered? Tweet them with the #askaninvestor hashtag, or email them here.
Entrepreneurs that successfully raise funding will often need to meet with dozens of potential investors before finding a lead, let alone filling their round. In order to get dozens of meetings, you’ll likely need to start with 100+ investors on your target list, assuming some will not respond.
In order to manage the process of meeting with these investors, many entrepreneurs will build out a spreadsheet of prospective investors and manage the process much like any other sales process, getting introductions to leads, and then following through to close the sale. (Closing in this case meaning getting the investment paperwork signed and the money in the bank.)
VCs that are just launching a fund can be a great place to start because they’ll be looking to make investments to start their portfolio.
The first people to go on your list are investors that you are directly connected with through your personal or company network — family, friends, customers, mentors, or colleagues that might have the means and interest to invest. These close connections are most likely to turn into your lead investor, setting the terms for your round and starting the momentum needed to fill the round with other investors, likely investors you have a less longstanding relationship with.
Once you’ve made a list of existing direct contacts, you will want investors that you want to target, but aren’t yet directly connect with. The best way to find new potential investors for your company is to mine online platforms like CrunchBase, LinkedIn, TheFunded.com, and AngelList.
Through these platforms, you have direct access to investors, and can vet investors based on activity, industry, and even the average size of their investment (often referred to as cheque size) before meeting with them. That means more opportunities to meet with investors, less wasted time in meetings with investors that don’t actively write cheques, or with investors who don’t invest in your space.
When putting together your list, you will want to make sure you are selecting investors that are a good fit for your round. To evaluate the fit of an individual at a VC firm or an angel investor, you’ll want to look at a number of factors.
Here, we’ll go through the top nine factors I look at when evaluating an investor.
1. Personality fit
The first factor you should consider when evaluating an investor’s fit for your business’ funding round is personality fit. Picking your investors, much like picking your co-founders, is like getting married. For better or for worse you’ll be working together until the company dies, one of you leaves the company, or you reach a liquidity event.
Your investors, especially investors with a position on your board, are effectively your bosses. You will need to listen to them and manage their interests. Bad personality fit will make you hate sending investor updates, avoid calls, and dread board meetings. Good personality fit will make running your company more fun, and will make it all the more likely that you’ll have a productive long term relationship.
2. Domain expertise
Second, you’ll want to look for investors that have domain expertise in your industry. You want investors that are knowledgeable about what your company does. Either they have operated a company in the space, have invested in companies in the space before, or have related experience that makes them valuable to your particular business.
Someone who invests in consumer e-commerce may not be the best fit for a B2B developer platform. People that get what you do will be easier to pitch, and more helpful as investors; asking better questions, and bringing more relevant connections and advice to the table.
Unfortunately, many investors, angels, and VCs alike will claim to be actively investing — meeting with many entrepreneurs — but rarely actually writing cheques. These investors will be wasting your time. Make sure the investors you’re contacting have written a cheque in the last six to 12 months. This information is usually fairly accessible through AngelList and Crunchbase, but may need to be determined through direct conversation with the investor or people in their network.
4. Track record
Some investors have better financial performance than others. They have had more successes, are more respected, or more connected in the industry. These are the investors you’d prefer to work with. You don’t want to be working with investors that have bad track records or reputations as it could affect your credibility. You can find out about an investor’s track record by talking to entrepreneurs that they have funded or by reading about them online on sites like TheFunded.com, and AngelList. If you are part of an accelerator, you will also find that alumni tend to be very open about sharing their experiences with investors.
5. Strategic fit
Strategic investors can add a lot of value beyond money. Is the investor well-networked with one of your potential acquirers? Are they a potential acquirer themselves? Can they open doors to new clients? Will they help to position you better in your industry? Some investors will give your business a strategic advantage, making them more relevant targets for your list.
Stage relates to both your company’s stage, and the stage of the investment fund you are talking to — if you are talking to a fund.
When raising your round, you want to talk to investors that are commonly part of seed and pre-seed deals and who are comfortable being the first cheque into a company. You will waste time by talking to investors who only invest in later stage rounds.
Some entrepreneurs prefer to work with a respected VC still early in their career; someone they can build a long-term relationship with.
When it comes to fund stage, it is better to receive venture financing from a venture fund that is still early in its lifecycle. Most venture funds are set up to exist for five to 10 years. The first three to five years of the fund are the years during which the VCs actively invest, and the remaining years are the time when the VCs harvest, seeking a cash return from their investments to return to their investors (known as Limited Partnerships or LPs).
The closer a fund is to five to 10 years of age, the more pressure you will face to provide a liquidity event. Not only will getting investment from a fund early in its lifecycle decrease the pressure on you to accept a premature liquidity event, but getting money out of a fund early (before they have made all of their investments) also means that the fund will have more money in reserve when they invest in you. The more money the fund has uninvested, the easier it will be for you to go back to that investor and ask for follow-on funding.
Tenure refers to how long an investor, typically a VC, has been with their current fund.
Some entrepreneurs might prefer to work with a VC who is respected, but still early in their career; someone they can build a long term relationship with. Others may prioritize working with a very seasoned VC with more connections.
VCs that are just launching a fund, or starting at a new fund, can also be a great place to start because they’ll be looking to make investments to start their portfolio. That said, they may be looking for safer bets than a VC with a long-established track record.
Different things will matter to different entrepreneurs, but it’s important to be aware of tenure so that you can make an informed decision.
8. Fund hierarchy
The typical career path at a venture capital firm is very structured and the primary roles include:
Most established firms require that newcomers to the industry start at the bottom of the firm hierarchy, working their way up to partner. Smaller firms and younger firms, like 500 Startups, are usually willing to take a chance on newer players to the venture capital world.
Analysts are not part of the investment team at a firm, and are rarely involved in an investment decision. Associates are at the bottom of the hierarchy when it come to the investment team. They usually do not have the discretion to write cheques. When evaluating VCs and creating your target list, you want to be working with Principal level VCs and above, ideally connecting directly with partners who have the ability to sign off on deals.
That said, you need to be respectful of all people within a firm. Flat out refusing to meet with an Associate, or being arrogant or disrespectful to lower level firm employees will not go over well. Word about your behaviour will travel quickly throughout the firm and the venture community.
Another very important role within the venture firm not listed here is the executive assistant. Executive Assistants have a lot of power. They effectively control the VCs calendar. Be nice and get on their good side. They can get you a meeting, when otherwise the VC would have been booked – and can make sure your email gets answered, even if the investor missed it initially.
9. East coast vs. west coast
West Coast investors primarily refer to investors in Silicon Valley. East Coast investors primarily refer to investors in New York and Boston.
West coast investors are more laid back. They are known for 1) making more long shot bets, 2) relying less on metrics, 3) basing their decisions more on potential, and 4) being more founder-friendly in their terms; higher valuations, cleaner term sheets. That said, West coast VC are less likely than east coast VCs to participate in the earliest rounds of funding, preferring to invest after a prototype is created.
East coast investors are known for being more analytical, relying more on metrics, and for having more investor-friendly, heavier term sheets. While there are always exceptions to these overgeneralizations, understanding this difference may impact your impression of investor fit.
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This edition of #AskAnInvestor is adapted from Katherine Hague’s book Funded: The Entrepreneur’s Guide to Raising Your First Round.