In my experience as an entrepreneur and investor, I’ve learned that most startups have little knowledge of how best to approach and win over investors. Even if an entrepreneur has pitched to investors and has first-hand knowledge, there are still workings behind the scenes that can be perplexing to those startups that have yet to land their Series A.
I’ve interviewed many venture capitalists, and they are all wildly different, are the firms for which they work. Do your homework and this insider information will give your startup a huge leg up in a very competitive market.
- Investors want a company that is successful, not one with a probability of being successful.
Much work must already be done by the time you bring your pitch to investors. Can you demonstrate a healthy following, and a problem that has been solved for a large audience who is already excited? You can see this again and again on Shark Tank; Mark Cuban doesn’t invest in companies that are a gamble. He is looking for companies with a measurable success that his investment will scale, not save. Your company should already be able to show how successful you already are, not how successful you could be.
- Investors want experienced teams who can take the project all the way through to massive scale.
VCs are just as interested in the type of people who are running the company as they are in the business concept that is being pitched. This cannot be understated; the passionate, devoted, exceptional team who has already had success has a much greater chance of garnering the interest of investors than an inexperienced team who is just starting out with a great product. If you’re new to the space, it is essential that you build a team of people who have already had success and can bolster any inexperience that may hold you back. Venture Capitalist Chris Haroun, partner at Artis Ventures, says he looks for “a founder that can convince a firm that they can passionately sell the concept or business model idea -- more often than not can also convince customers of their product/service to sign a purchase order.”
- Most investors find projects through referrals.
Building a network around you is one of the most important things to get started on, if you haven’t already. There is little to no possibility that you will find the correct investors for your project without meeting the right people. Your credibility when you cold call investors is nil -- you can imagine how many startups are trying to get in on the ground floor. Most investors have trusted advisors who bring projects to their desk, and those advisors are who you are trying to meet, not the investor. Once you have a trusted ally whose credibility is trusted and can make an introduction, you’re golden.
- VCs like to invest in fields that they know.
Not every investor will want to invest in your business, even if you have a successful company and killer product. Most investors tend to gravitate toward topics with which they are familiar, or areas in which they have worked. Your job is to do the research to find the ones who are investing in your particular field or niche.
- Investors do their investing in teams or groups.
Most VCs are not investing by themselves. There are multiple people all on board, investing as a group. Find out who is investing with whom, and what they are interested in. What companies have they started, and how can that knowledge help you? Haroun adds, “A source that many entrepreneurs use is Crunchbase.com. At this website you can find out which venture capital firms invest in which types of companies and what other venture firms they tend to partner with most often.”
- Investors get money from different types of investors themselves.
Besides the different investors that you may pitch to, you also need to do your homework on what types of investors are in the fund. What are their objectives? What kind of space do they tend to invest in? Don’t assume that you know everything there is to know about the fund because you researched one of the investors.
- Each fund invests differing amounts.
Before you spend time to pitch to a fund, find out how big or small are the investments that a fund makes. You may be looking to scale with an investment of millions, and the fund is only contributing up to 500K. Make sure the fund marries with the funds you’re looking for. “Earlier stage venture investors tend to invest smaller amounts,” says Haroun. “The converse is true for later stage venture investors. It’s important to target the right one based on where your company is currently in its life cycle.”
- They have different time periods for investing.
Getting money in an investor’s time scale is important. A few investors and funds will be able to give you a check at the meeting, while other investors can take weeks or even months to give you the money, even if they want to invest. Funds run by rich individuals are normally the fastest to act. If you are closing a round, need to have all the money in before you can draw it, and you want money fast, do not include those that are slow to act. “It’s imperative that you also find investors that have a commensurate investment time horizon as you do,” adds Haroun. “If you don’t expect a liquidity event to occur with your company for at least 5 years, then make sure that your investors are also like minded and long-term focused.”
- Some won’t lead -- they will only follow other investors.
Even the most experienced venture capitalists will sometimes not take risks on companies that are not already vetted through other investors. Find out if the VCs that you are interested in will lead, and devote your time and energy towards getting a pitch in front of those people. If they will invest, you’ll have a much easier time getting others on board.
- Know the age of the fund.
Most funds are designed for ten-year lifetimes. In reality, it takes a little longer than that for the fund to exit its investments and shut down. If a fund only have a few million left and wants to close out the fund, then that could be a good time for you, as they want to complete the project. Pay attention to the time scale that a fund is on, and see if that will be a good fit for your business.
- Some invest globally, some local near them.
Some investors only invest in companies that are based near them. Oftentimes they want to be at board meetings, and it’s much easier to drive then it is to fly if they want to attend. Give your time and energy to investors that want to invest in local companies, or investors that are known for traveling to their global companies. Haroun advises, “You can always find out if a venture firm is willing to invest globally by simply visiting their website and look at their current and prior portfolio companies.”
Much of what I’ve learned from interviewing VCs requires that entrepreneurs have extensive knowledge of the investors that they are dealing with, so be sure to do your homework. But remember, VCs aren’t just interviewing you -- you are also interviewing them. Don’t be afraid to check with CEOs of companies that they have invested in, and see what kind of investors they are. The more information you have, the better.
Murray Newlands would be thrilled if you’d share this story with your networks. You can find him onTwitter(@murraynewlands), Instagram (murraynewlands) and Vine (murraynewlands) and learn more about his work at www.murraynewlands.com
