One of the most fundamental steps (if not THE most fundamental) in a startup’s journey is searching and securing financing for the current stage or round. The search can be long and unfruitful because many startup founders aim for that sweet VC money without ever thinking if it’s what they really need.
There is such a thing as a wrong investor: one that demands you give up too much and doesn’t see eye to eye when it comes to your vision of the future. And that’s without debating if the personality fits. The idea is to uncover potential investors who fit your profile, needs, and expectations. Here are some useful tips on how to find the right investor for your business (the emphasis being on ‘right’):
1. Understand you have different investment options
Not all investors are the same – far from it. They differ both in terms of how they invest and what they expect in return. For instance, you have:
- Personal investors – F&F (friends and family): Friends, family, and close acquaintances are one of the most direct ways to get a new company started as they are relatively easy to convince. However, due to the sensitive nature of having them involved, legal precautions may be necessary.
- Angel investors: Wealthy individuals and successful entrepreneurs who are passionate about a certain project will understand your game plan better than most people out there. Some will even be able to act as mentors and advisors, and they’ll make either a one-time investment or continue investing in your business over time.
- Angel groups: Angel investors sometimes band together in groups to take advantage of combined resources and lower risk exposure.
- Peer-to-peer lenders: You can apply for credit to companies specializing in P2P lending with an interest rate. The borrower (you) gets a better interest rate than what they would get from a bank, while the P2P lender earns a higher return than through a savings account, for example.
- Accelerators and incubators: Accelerators are investment companies that focus on scaling an existing business fast by providing financing, as well as access to a large network of mentorship and education. Incubators build out a business model and company by providing logistics such as office spaces, specific management training, and other fine details needed for success.
- Venture capitalists: The source of more substantial amounts of money and relevant expertise, VCs usually invest in startups that have already demonstrated a certain level of success and they have a greater degree of risk tolerance. Turning to VCs means you will have to give up partial/complete ownership and let them have a say in the company’s decisions for maximizing long-term growth potential.
- Corporate investors: Corporations often see startups as a convenient way to generate more profit while investing to improve their platforms or because they’re aligned with corporate interests. Corporate investors are also a great source of strategic financial expertise and connections with potential clients and other businesses.
- Others: Some investors don’t conform to any specific type, an example being M51 – a non-VC investment company that provides entrepreneurs with funding and a support network necessary for success.
Note this: your ideal investor type will change as your startup moves through different stages. For instance, family and friends can be a great option at the early development stages, angel investors are more suitable for early-stage rollout funding, and venture capitalists will likely be interested only when you have achieved some tangible results.
2. Know where to look for
Assuming you got the hang of the diversity of the investor ecosystem, it’s time to start seeking them out. There are multiple ways in which you can do this, including:
- Look through popular databases: platforms and websites like AngelList, Angel Capital Association, Gust, Angel Investment Network, Funding Post, and a bunch of others will be high on every entrepreneur’s list, and you should be no different. You can try crowdfunding platforms including Indiegogo, Kickstarter, GoFundMe, and so on if you think that’s the way to fund your business.
Unbeknownst to some, Crunchbase is also an excellent source of investor information as it has a dedicated section on its website called “Find investors”. However, the full database can only be accessed as part of its paid service.
- Scour social media: By this, I mean primarily business-oriented social media like LinkedIn. A quick search there for ‘investor’ will deliver over 1 million results – people, companies, and groups. Not all of them are relevant to your needs but it’s a start.
- Maximize networking: Go to those who have found funding already. Since many investors are focused on specific markets, they are likely to look for companies to fund through networks. This is why it’s worth talking to your industry peers about best practices and specific individuals or organizations that might be interested in your business.
You can also look for fellow startup founders that have sold their business not long ago. Their experience might prove invaluable as they can offer a perspective from the partner, advisor, and even investor angle. If used wisely, networking can be a highly productive tool for finding investors.
- Ask for an introduction: Word of mouth is still more personal than any other way, especially if the recommendation comes from someone investors trust or have dealt with before. Colleagues, friends, neighbors, or even total strangers (as long as they’re in the relevant field, preferably successful entrepreneurs themselves) can provide a recommendation. Ideally, they are also strong believers in your solution and who knows, maybe some of them will be interested to invest themselves.
- Attend relevant industry events: Investors attending an industry event are interested to hear about the startups with the best ideas to invest in. These events are also great opportunities to meet thought leaders who can give you important feedback on your strategy and information on leads to potential investors.
- Leverage your local network: Sometimes you don’t need to look further than your own backyard, especially if your idea is to start local and go global. A lot of investors actually prefer funding the startups in their vicinity as they can have a more hands-on approach and active involvement.
3. Know what to look for
Now that you know where to look for, it’s time to get choosy. Despite the common belief, an entrepreneur looking for an investor is allowed to be picky. In fact, I advise you to absolutely be like that because the investor you choose will usually become a large part of the decision-making process. For better or worse, they will blend into your brand and culture, hence, he or she needs to believe in the same or at least similar vision as you do.
After you’ve pulled together the list of potential investors suitable for your business, you should begin the vetting process to see which of them will result in a true match made in heaven. This process includes visiting the chosen investors’ websites and social profiles and learning all about their investment criteria.
Luckily, it shouldn’t be difficult as most of them will have their preferred area of focus, revenue models, and current portfolios available for all to see. If not, your networking ability will come to light if you are any good at obtaining such information through third-party channels. You should also check what is the preferred stage of development and see if their reputation holds.
Equally important is that the investor believes in you and that you can get along. They don’t necessarily have to be good people (although it helps a lot) but they should give you enough room to do your thing and get along with the rest of the team. I speak from personal experience – understanding entrepreneurs on a personal level is the investment mantra we go by. You can be this amazing entrepreneur star and a business wizard but if we don’t click – close, but no cigar.
If you know how to find the right investor for your business, this initial stage in your startup’s existence should make it easier to reach your goal(s). We’ve all been there at some point in our entrepreneurial journey. This post aims to point you in the right direction based on some sound practices and personal insights. It will take some persuasion and hard work but eventually, it pays off.