Diary of a venture scout: looking for the right investor
Jan 27, 2014
[Read here my previous post in this series].
This post is about looking for the right investor. If you are an entrepreneur fund-raising for the first time, you are probably thinking that I am a fool, because “all money is good money”. In this case, you should review your fund-raising priorities, for at least two reasons:
- Do not waste time with investors that will clearly NOT invest in your project;
- Do not go after investors you DO NOT want to have as your shareholders.
As an entrepreneur, you should be aware that not all investors will invest in every possibile project, as promising as it may look. Scrupulous investors tend to decide well in advance which markets they will be after*. In addition, VC funds (as well as experienced angels) will probably have set in advance a few rules of thumb regarding their type of intervention, e.g.
- How many investments to close with the current fund (rule of thumb: fewer than 10 for each general partner; and the later the investment stage, the lower is the number).
- How much money to allocate for the average investment (angel money vs seed money vs early stage money).
- The type of investment (equity in either minority or majority proportion, convertible debt, and so on..).
Keep in mind these points when you start out your fund-raising efforts.
How to look for the perfect investor?
Once again, Mark Suster has just released a great post on this topic: read his post, then come back, if you please.
As a rule of thumb, please remember that the investor will choose you, not the other way around. You can, however, have a say in this process, by attracting attention and getting in touch with the investors you DO want in you captable. Here a few points:
- No matter what, PITCH. TO. EVERYONE. The more you pitch your startup, the more feedback you receive and the better you get at pitching. For those fearful of idea-theft, pitching does not mean unveiling all your secret ingredients for success.
Do your due diligence for each single investor you meet: check its website and the VC partners background (use AngelList, Linkedin, scour.com, VC news sites, thefunded.com). Try to understand whether one of the partners has a background in your market and try to meet him. Even in the negative case of a resounding “no”, you will get much valuable feedback from the meeting.
- Remember to check the rest of the team, too. You will have to meet and convince associates and directors who will work on your investment case.
- Make sure the fund is active and investing.
- Check the fund investment history. Look for competitors or potential partners for your project. Be ready to discuss and be challenged.
- Try to meet current or former CEOs backed by the fund. They tend to be open to interesting chats with other entrepreneurs. In case they like your project, they may even provide a good referral (see my previous post about VCs deal flow). You want to understand how to approach the meeting: ask them for the three most important aspects you will have to pinpoint when meeting the VC.
- As Mark Suster says in his post, look for the right “value addition” from the investor; this will usually come down to:
- Pressure to execute
- Support in fundraising for further rounds
- Introductions to prospects and to job candidates
- Ability to work with board of directors and with companies
As with everything related to VC and fund-raising, internet is full of useful posts. I’ve collected a brief selection here.
(*) But do not completely rule out gut-investing! ;-)