5. Finding the right investors & advisors (for you)
Note: this is Part 5 of Fractionalist’s Startup Fundraising Series for Early Stage Companies.
Everybody’s check cashes
People often ask me about how to find investors and advisors for their company. When it comes to investors I always give them one bit of advice; everybody’s check cashes. It’s what happens after that matters.
When looking for an investor you need to think beyond just a great valuation, quick process and “sexy” pedigree. When the chips are down, will this investor be in your corner? Early stage companies are risky and will always have their ups and downs. The investor you choose should be ready to go along for the ride.
Just as with founders, you’re basically getting married to your investors. You have to put up with the good and the bad (for better or worse). Divorce is a messy proposition.
Evaluating investors
Your company is being assessed by investors. Are you putting in the same level of due diligence in learning about them? Here are questions to ask as you investigate if they are a good fit for your company.
What is your investment criteria? (Can they provide the capital you’re looking for and do they invest in your industry/ sector? This should be one of your earliest questions.)
What was your best investment?
What is your biggest learning in investing?
How can you help us besides the money?/ Tell me about a time when your network helped one of your startups?
What is your investment philosophy? / What type of people do you want to invest in?
How many investments have you made in the last 6 months?
What is your average deal size?
Who are your LPs?
How do you make investment decisions?
In what percentage of your investments are you participating in the next round?
Average time from investment to sell of your stake?
Where do most of your deals come from?
Who do you see as your nearest competitor?
Do you make your own decision to invest or do you wait for other investors to invest first and follow?
What is the most common way for an exit in your fund?
What are your assumptions when investing in us? What do you expect of us?
What are the results / metrics that you look at for our industry?
Can you give me the contact info of founders you've recently invested in?
This last question is one of the most important. When evaluating potential investors I ask for references from portfolio companies they have funded. You want to speak with the CEO who has likely had the deepest relationship with the investor. You will likely get their “best” portfolio companies but that is okay. When you’re on the phone with another CEO asking serious questions about taking investment they will be candid.
“Would you take money from this investor again?”
The one question that says everything without saying anything at all; “would you take money from this investor in the future?” If they say “no”, they aren’t slamming their investor, they are just telling you how they feel and it’s a telling signal. I’ve gotten it and walked away from investors because of it in the past.
Selecting advisors
Selecting an advisory board member is a different proposition than an investor. Your advisory board does not have fiduciary responsibility for the company. Advisory boards help fill in knowledge or experience gaps within your business for the stage you are at today. The value you may get from an advisor is about 18-24 months tops. After that, assuming things are going well, you tend to outgrow them from a help perspective. I structure their compensation accordingly.
Why do you want this person on your advisory board? Are they going to give you help with specific parts of the business? Introductions? Will they help send a message to the market about your positioning? All of these are great reasons to bring someone on. However, sometimes you can get away with just buying someone lunch and accomplish the same things without the burden (or dilution) of adding them to the advisory board.
Connecting with investors and advisors
How do you find potential investors and advisors? It’s a crappy answer but it’s all about the hustle. Network, network, network. You should carve out a portion of your week (even if just 30 minutes) to manage and grow your professional network. Look at tools like Lunchclub for new connections and LinkedIn for keeping existing connections warm.
If you regularly engage with your professional network, you are much more likely to get warm introductions. Warm intros go WAY further in getting you in with folks than cold intros. If you do have to do cold intros, do exactly what you would do if you were trying to sell something to them. Research them. Look at their past blog posts, social media and companies they have worked at so you can craft the right intro email that will catch their attention and pique their interest because you have given them bullet points on who you are, what you’ve built and the traction you’ve got.
Managing the process
Relationships matter. Remembering all of the details of various meetings requires more than a good memory. Create a simple investor spreadsheet with details on the potential investor (contact info, website, recent fundings, call summary, etc). I maintain a spreadsheet for the course of a company and then categorize people in different tabs. Some firms might say no at your current stage, but you can ping them again when you go to raise your next round. Having the details from your last interactions handy makes that next call with them that much easier to make successful.
Whomever you select as on the investment or advisory side has to be a good fit for what you and the company need to be successful. You don’t have to agree with their every point-of-view, but you do have to feel that they’ve got the best interest of the company at heart and the knowledge to help grow your business.
What’s next?
This is part of the Fractionalist Fundraising Series for Early Stage Founders. We always appreciate feedback on the series and we're always here to help you with your fundraising efforts.
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