In the first part of this series, I covered how to get meetings with investors. Now I'm turning to help you pick which investors are right for you and your startup. My startup, Coursefork, is right in the midst of this process, and I'm learning about this every day.
Angels vs. VCsAngel investors are very different than Venture Capitalists. It's important to understand the distinction, which boils down to this: Angels invest their own money, whereas VCs invest other people's money. This has ramifications:
1. Angels invest based on their ability to add value through their personal expertise or connections. They tend to be highly focused on personal relationships.
2. VCs have (in most cases) a lot more money to invest. They also have a fiduciary relationship to their investors, which means they'll likely want more control over your business.
VCs are more accessible than you'd think, but catch them when they want to be caught - for most, that means events and office hours, if they hold them.
VCs are generally busy, so trying to insert yourself into their week may be hard. Email updates are the heartbeat of your relationship. Most of the VCs we've met with we first kept updated over email for a few months, and only then did they take a meeting.
VCs can give you good feedback when you're ready to scale the business, but typically you'll be talking to Angels first.
First of all, your Angels should be rich. Read up on Regulation D and the definition of Accredited Investor: To be exempt from onerous reporting requirements, your Angels will need to have assets greater than $1 million dollars (excluding their pirmary residence), or average income greater than $200,000 over the previous three years.
If you know the investors have invested in other companies in the past and have entrepreneurs to vouch for them, you can skip asking them whether they're accredited. But for someone you have less of a connection to, you can tactfully ask them if they're accredited. This is basically the nice way of asking if they're rich, which you need them to be.
So is being rich enough? Money is, as a rule, good to have. But more than that, you want investors who can add value. As you network with founders and find out who their investors are, you'll start to hear many of the same names.
Some of these investors are what I'd call professional investors- they spend most of their time and energy investing in and working with companies. Professional investors can be huge assets- and many are extremely talented and smart. But make sure that their expectations for how much control they'll have over the business are in line with what you want from them.
For us, the ideal angel investors are current or recently exited startup founders who do angel investing on the side. These investors have more going on day-to-day, so they may be harder to get time with, but their fresh experiences and active connections are, for us, ideal.
Personal QualitiesRegardless of the category they fall into, here are four things you want your investors to have: Smarts, experience, respect, and connections
Measuring CommitmentThere are several main factors influencing your investors' commitment (or potential commitment) to you. I'll share from personal experience.
As you can read on his blog, Tim Huntley has a deep and nuanced view of the key issues regarding startup financing. And as the former CEO of Ganymede Software, he understands the view from both sides of the table.
Tim and I have had a few great conversations over email, usually in response to one of his posts or his newsletter. Most recently we got to talking about how to have committed investors.
My emphasis was on the size of the investment, which we at Coursefork believe is an important factor in getting mind-share from our investors. This is true, but my view from the investor's perspective was incomplete. Tim convinced me that the two other items are just as important.
Mind ShareFirst, investors with too many deals won't have much mind share for any given company, just as a function of time. And if investors have too few deals, they might feel compelled to take too active a role in your company, which can limit your effectiveness and agility. But, most importantly, he reminded me of the mutual importance of investors being able to follow on.
Follow OnFollow on investments can come in two main forms: Investing in an entirely new round and pro-rata participation in a round. Usually, the former will happen with angels only if you're running low on cash and are unable to raise from VCs. Pro-rata participation is the name for buying in during future rounds to keep their ownership percentage of the company constant.
The ability and willingness to follow on is crucial to both your success and the investor's. In the former case where you're as yet unable to raise money, a follow on can save the company. In the latter case, if the investor is unable to participate and maintain their pro rata ownership, they'll become diluted. Excessive dilution is a big risk for your first investors, and it's something you should protect them from.
They are, after all, the first people to put money behind your idea.
I've saved what should likely be the biggest factor in choosing investors for last. It's critical that you know and understand the investor's strategy and that their goals for your company are aligned with yours. This is the vice-versa of their evaluation of you, and too few entrepreneurs subject their investors to the kind of scrutiny they should.
Strategy and Goals
Why is the investor an investor? Good investors have strategies that work for them. Often with Angels, this is a focus on an industry or operational function the investor is able to lend a hand in. Sales, User Acquisition, or Hiring might be examples.
Investors who contribute their expertise help you (and their portfolio) beat the odds by combining your great idea and passion with their technique.
Speaking of portfolio, does the investor have one? No one has unlimited funds or time, so successful investors will budget both by adopting a portfolio strategy. They'll invest in a certain range of startups each year, and their portfolio will benefit from the distribution of risk.
Investors who are currently running a company may not have a portfolio approach since it's not their primary focus. That's fine, but it's still important to check to see that their prior investments are doing well and seem to have been made according to some sort of strategy.
What are YOUR goals?This is the first question you should ask yourself when looking for investors. It's the question I'll leave you with, because it'll take some time to think through.
You need to know what your goal is so that you can effectively communicate that goal. Plenty of investors will not be a good fit for you to achieve your goal, and that's OK. Just make sure you keep the conversation focused on goals so that all parties can quickly evaluate whether a deal makes sense.
That conversation will depend heavily on what financial story you can tell. Many investors are looking for relatively low risk, high revenue businesses. Build revenue and have a profitability within 1-2 years, and you'll find it easy to raise money.
If you're a high growth startup like we are, it'll take a lot of effort and a few plane tickets to find investors willing to think as big as you do. High growth startups are optimizing for profitability years in the future.
Make sure that you have a clear statement of your goals for the business, and that your investors buy and back your story for how you'll be successful.