6 Ways to Select the Best Investors for Your Startup
All startups require capital, and investors have it. The worst thing you can do however will be to try to close the deal with any and every investor that comes your way. Not every investor with pockets full of cash is the ideal investor. You need to be smart when it comes to choosing the best investors for your startup.
The involvement of investors in your business goes way beyond providing funds for you to run your business. And truth be told, some investors/investment firms out there are just plain evil; their only goal being to take over your business.
“How much capital do you need?”
“How soon can I start to see returns?”
If these are the only type of questions you hear from an investor you are considering, run.
Such an investor will run your business – and you along with it – into the ground.
While there are many ways to source for funds and raise capital for your startup, the process of choosing the best investors for your startup is as rigorous as it is pertinent. Consider the following points to make sure you end up with the best investor for your startup.
Understand the various investment options available to you
A plethora of investment options exist in our business atmosphere. However, knowing the right investor to approach lies in properly understanding the different investment categories and what each can bring to the table.
Angel investors for instance are individuals with substantial wealth who always keep an eye out for startup investment opportunities with high returns. They are generally less demanding of your business than say venture capitalists as they tend to be more lenient on their initial requirements. If they agree to fund your business then for the most part, it means that they have no problem with your business policies and direction.
Angel investors have good individual experience and expertise but venture capitalists have the upper hand in terms of breadth of resources to help grow your business.
Venture Capitalists offer more money than angel investors but have a more stringent approach to investment. VCs almost always require hard, empirical data usually in the form of a well-presented and thoroughly vetted, ironclad business plan before funding is made available.
There is also the option of seed investment (check out YCombinator). This is ideal when all you need is a tiny sum of money to get you going. A seed investor invests tiny amounts (seed capital) of money into a company during its early days in the hopes of grabbing percentages of companies before they explode.
So depending on the amount of money you need for your startup and the phase your business is in you can decide what investment option best suits you.
As a general rule, it is better to turn to seed investors/angel investors during the earlier days of your startup. Venture capitalists will be more agreeable during a subsequent round of funding when your startup is already established and running.
2. Know what you want from investors
Most of the time, startup CEOs tend to be the ones on the hot seat when meeting with potential investors. But the business in question is yours; you should be able to ask questions too. You do not want to fall into the hands of the wrong investor now, do you?
Find out from them what role they see themselves playing in your company, how involved – or hands off they will like to be in the running of your business. Also find out how reputable they are and the stage of development they usually invest in.
Please don’t take this lightly!
You should ask these questions to ensure that you get the right and best investors for your startup and ward off any conflicts that may arise in the future.
3. Tailor your pitch deck to attract the best investors for your startup
According to Bo Yaghmaie, your pitch deck is arguably the most important document you will generate in the life of your company. He describes it as the ‘hook’ by which you will grab the attention and imagination of an investor.
What approach should you apply to come up with the perfect pitch deck?
Here is an example:
Looking at the needs and vision of your business, create an imaginary profile of what qualities the ideal investor should possess to meet them. This will guide you in preparing information that the ideal investor will be interested in.
In your pitch, discuss how your product/service will help solve a problem. Make sure that you communicate to them how you will generate profits and how that will flow into their pockets.
Having a business plan armed with accurate and realistic financial and market research to back up your predictions will help in this regard.
4. Select the best investors for your startup from within your target market
As a business owner, you understand how important customer satisfaction is to the growth and sustenance of your business. Now imagine that one of those satisfied customers is a potential investor. That will be a double win for you and your business.
If there are investors to whom your product/service directly relates or affects, you will do well to search them out. Such an investor already appreciates the value your product/service gads to their daily lives and so will be keen to invest in the business.
The unforeseen advantage here is that this kind of investor will most likely stick with you through hard times, and will not abandon you when the going gets tough.
5. Bootstrap before seeking out investors
This is one of the most effective ways to prove that your business model works. Running your business without external aid, helps you during this period to be able to tweak your product/service and business model until you come up with a product-market fit that works for your startup.
When you are finally at the stage where you need external aid from investors, you will approach them with an air of confidence. This is because you are sure that your business works and to what degree.
It is wise to note however, that this path is not for the faint hearted. So be sure that you are prepared for the rigors of bootstrapping before attempting it.
6. Find investors that can add real value to your startup
A smart business owner should always be on the lookout for investors whose contribution to their business success goes beyond monetary funding. These sort of investors are not just along for the ride – or the profit.
Great investors will challenge you in ways that will force you to look at your business differently even after your countless sessions of brainstorming. Other than money, they will offer other resources available to them to help you adapt your business so that it stays relevant and hence, on a growth trajectory.
Always go for investors who are willing to make your company more valuable through not just their money, but their insights and networks too.