For startups, it pays to be picky when securing funding. Here are a few key considerations to make when choosing your investors.
Starting a new business can be as terrifying as it is exciting. Of the many challenges startup owners face in their struggle for growth, securing funds is the most hectic. With banks and other venture capitalists doing a lot of vetting to ensure they invest in the right business, securing funds becomes increasingly difficult.
Sadly, when you are desperate to fund product development, market your startup and grow your team, it is incredibly easy to accept the first biggest venture capital that comes along.
Unbeknownst to many, you must conduct your due diligence, the same way an investor does, to ensure that you set yourself up for optimal growth.
That said, here are three points to guide you in choosing the right investor:
Until you understand you are doing what you are doing, finding the right match will be difficult. Therefore, before everything else, have a clear understanding of your own goals.
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Are you trying to make money? Will this be a long-term venture? Do you want to be at the helm at all costs? In a nutshell, why are you building this company? Not every venture capitalist is going to be a perfect match for your needs.
No matter your long-term goals, it’s important to find a trustworthy investor that wants the best for you and will prioritize your company’s success over all else.
Times get tough, and at this point, you need your investors to work with you and support you in making the right decisions for the company.
In difficult situations, you will need to have crucial and transparent conversations with investors. Getting through the hard times takes trust built during good times.
Ultimately, you are bringing investors into your war room, and the last thing you want is to have someone who is actively putting their interest above the company’s.
It is easy to check how credible an investor is. You can utilize the internet, which, incidentally offers a wealth of data on venture capitalists. Check the investor’s portfolio. What have they backed? How many of those ventures made it?
Finding an investor with a winning track record matters because success drives more success. If your investor has a network of successful operators, you will be surrounded by other successful leaders.
A good rule of thumb: It is always better to be on the backup team of the winning portfolio than on the primary team of a losing one. Think about the diligence these investors are putting you through and how thoughtful they are with their questions.
If they are not impressing you, that should be a red flag. If they are putting minimal effort into their diligence on you, that should speak volumes to how they conduct this process across the board. That tells you they are not picking winners, and you want to be on the winners’ team.
If you are raising your series A, don’t get complacent. You should already be thinking about raising your B and C rounds, too. Who invests in your current startup round will send signals to other future round investors.
And importantly, your current investors will also be crucial for helping you find future financing through their network. When an investor on a top list picks you, many other investors will give you the benefit of the doubt. That is hugely important when you have to raise your next round.
You should be looking for an investor who will have the benefit of the doubt with other venture capitalists. If they do, they’ll be able to call other investors on your behalf and make a case for why they should put more money in your company.
You want investors with a similar view of the world, whether that means they share the same perspective on society and life or align on the business goals, outcome, and strategy of building a good company.
When you partner with investors, you choose people you’ll bring along with you on your journey, so you need to pick people who reflect your values.
Doing so not only makes the journey easier but also ensures that in the end, when you are successful, your investors are successful with you.
Choosing the right investors for your startup is a fundamental step that is almost as important as getting funding in the first place. Therefore, ensure that you look for a partner with a good track record aligning with your vision. He or she will help you build your network and map with your perspective on life. Doing so will set you up for long-term success and make the startup journey a bit easier along the way.
Article first published in Entrepreneur.