In 20 years of working for startups, I’ve never seen as many plot twists and turns as I have in the last several months. Times are tough.
But, from the perspective of raising capital, 2020 has not been an awful time to be a startup founder. The world has changed, but the fundamentals of raising capital are the same. In the first half of the year, VCs invested $129 billion, and Q3 is up 9% year-over-year, reports Crunchbase.
After the screeching halt to business in April subsided, founders and investors, people who are generally comfortable with uncertainty, got back to work raising and investing.
Choosing the right VC is one of the most important decisions startup founders will make. In good times, the choice can make or break a startup. When times are bad, it’s even more likely that the wrong VC partner could be the catalyst that starts a downward spiral. With many funds still looking to make investments before the end of the year and startups jockeying for cash, founders need to know how to find the right investor.
With many funds still looking to make investments before the end of the year and startups jockeying for cash, founders need to know how to find the right investor.
It’s not about simply choosing an investor — you are hiring your next boss. The investor should be someone you feel comfortable working with and working for.
You don’t want an investor who is checked out, but too much focus isn’t good, either. And, you don’t want an investor who is completely agreeable since your best outcome will be driven by a constructively demanding advisor.
My company, Quiq, had several term sheets when the dust settled on our Series B pitch meetings. Since the financial terms were similar, selecting an investor was made on a more subjective basis and boiled down to two fundamental questions:
- How can the investor help the business?
- What’s the risk that the investor will hurt the business?
I chose our investor because they had prior experience as a CEO with a very successful exit. They had a firsthand understanding of the challenges involved in running a business and would apply that experience to improving our company. A lot of investors only have second-order experience gained sitting around boardroom tables. Because I knew the partner previously, I was comfortable that we would have a good working relationship that wouldn’t be disruptive.
If you don’t feel like you’ve made a personal connection with an investor in the first conversation, trust your gut and move on. In the past, I’ve spent too much time with investors who did not feel quite right and they eventually opted out. That was predictable and I shouldn’t have wasted my time in follow-on conversations. Be confident in your ability to raise and move on.
You should also be asking yourself: How well does the VC know your market? At the beginning of the pandemic, our investors counseled us to prepare for the worst. We analyzed what could go wrong with the business and made a worst-case plan as our baseline. As time passed, we tweaked the plan as the new COVID-19 world came into focus.
In a possible worst-case scenario like COVID, your VC partner’s knowledge of your business and market is absolutely an advantage. A VC firm’s marque reputation is often considered by founders to be the most important factor in their choice of an investor, but I believe personality and market knowledge is more important.
Founders should also consider the VC firm’s “sweet spot.” Some VCs are great partners to early-stage companies while others may be best tapped in later stages. Founders should ask: What size company do they invest in? How much do they typically invest? What percentage of ownership do they expect? If the size of your company and the round isn’t close to the bullseye of the investor’s target model, move on.
Investors put money into businesses they understand and founders they trust and respect, but founders need to figure out how to build that trust and respect.
To build a relationship that could lead to an investment, keep VCs in the loop by sending periodic progress updates regarding deliverables and milestones achieved and personally interact at least twice a year (these days that means on Zoom).
Just like a successful salesperson keeps copious notes about each of their prospects, founders need to keep track of their potential investors. If an investor mentions she was touring colleges with her son on one call, make a note to ask how college is going on the next call.
Only spend time with those who react positively and show an interest. Use your network — research investors to see if you share a network connection and ask your common connection to casually drop a good word about your startup. Be simultaneously ruthless and considerate at being front of mind with your potential investors.
Even though the world is in chaos, the fundamentals of choosing an investment partner and raising capital remain the same. Good luck!