For most startups, funding is an inevitable step in their process to scale and grow. Whether it’s this year or the next or even in 3 years, your startup will need funding.
And to get funding, you need an investor or several.
Let’s fast forward for a second and imagine that everything is going well and you’re in talks with your potential investor(s). But something isn’t right. You feel like there are red flags popping up and you’re desperately trying to ignore them to get your funding.
But here’s the thing: You shouldn’t ignore investor red flags.
Because at the end of the day, you’re building a relationship with this investor. And you’re trying to grow your business. It’s not a one-and-done deal where the investor gives you money in exchange for nothing.
So how do you evaluate an investor? In this article, we’re going to show you what to look for in an investor, whether you’re an early-stage or later-stage startup.
The relationship between founders and investors
Investors aren’t there just available to provide you with capital for your startup. When searching for an investor, whether angel investors or venture capital funds (VCs), there are a few things to consider.
Will this investor offer you guidance? Help you grow? Have they built and exited a startup of their own in the past?
In addition, how you work with and treat your investors – and how they work with – should reflect positively on both your startup and your later requests for funding.
The most important factor in the investor-founder relationship is “the alignment of values,” early-stage VC investing firm Eleven reports, citing one of its partners and Telerik CEO Vassil Terziev as saying.
The alignment of values between a founder – or between co-founders – and an investor helps the business grow in the right direction, Eleven reports.
Other elements include (according to Eleven):
– Short-term versus long-term thinking
– “straightforward vs ‘behind the back’ board politics”
– Communication
– Setting the right expectations (for both)
– “active help vs blame distribution”
– “alignment of the risks and the opportunities from both the founder and the investor’s perspective.”
What to look for in an investor: Angel investors
One of the common questions founders ask when it comes to investors and funding is: What should I look for in an investor? This is more common if you’re an early-stage startup.
And as an early-stage or pre-seed startup, angel investors are your most probable option.
And though your startup’s needs will dictate what you look for in an investor, there are a few things to consider for the founder-investor relationship to work.
Image via Freepik
Think of it as general criteria to ensure you’re building a solid relationship rather than hungrily accepting anything only to regret your decision later.
The following points apply to startups regardless of business size, industry, or sector.
Let’s explore the 7 elements to look for and consider in an investor, especially a potential angel investor:
1) Industry experience
Does this investor have experience in your industry? Do they have a track record of helping startups grow or have built startups of their own?
“Your angel investors should have experience in the same business domain and in-depth knowledge of your industry. If they have achieved success in other domains or industries, they may give opinions on how to grow your business that aren’t applicable in your field. With the requisite experience, they can guide your business through the difficult start-up phase.” (Addicted2Success)
2) Is your investor a risk-taker?
Startups are generally risky businesses. Even with a brilliant idea, market forces, and great supply and demand, other factors may cause your business to fail.
So, is the investor you’re in talks with a risk-taking investor? Do they take calculated risks? Or are they so worried about their investment that most of their decisions tend to be emotional? If it’s the latter, you may want to wait a bit till you find a more suitable investor.
3) Do you trust this investor?
Trust is an essential piece of the startup puzzle. Naturally, you trust your co-founders with the confidential details of your business.
But can you trust your new angel investor? Or are they likely to use the confidential information you share with them to their favor and against you?
Further reading: 15+ Pressing Startup Funding Questions and How to Answer Them
4) Does your investor offer guidance and support?
While angel investors provide you with financial assistance, some have more to offer.
So, in addition to having industry experience, you should know early on if your investor can provide you with guidance. Be it in your day-to-day activities or your broader, more fundamental business decisions.
Was this investor a successful entrepreneur in the past? This can be a good indicator if they’ll be able to help you in your decision-making processes. Their expertise can help you overcome business and market challenges.
Sometimes angel investors may become like mentors for you and your co-founders or even your team. Having an experienced mentor can be of a higher value than the funds they provide.
5) Is your angel investor clear on expectations?
One of the most important elements to look for in a potential investor is their expectations. Do they have clear expectations of your business and growth trajectory or not?
You’ll often hear that startups have failed because investors were pushing them to ‘scale fast’ and the result was a startup flop!
Make sure your investor isn’t one of those.
While it’s important for your startup to grow at a suitable pace, speeding up operations and go-to-market may hurt your business. That’s why it’s important that investors have realistic expectations.
Having a clear cash flow plan and financial forecast for your company’s revenues and profits can help you clarify things early on.
In addition to having realistic expectations, your investor(s) should be patient.
Generally, risk-takers are in control of their emotions – especially when something bad or unforeseen happens. They know they’re taking a risk.
Still, it’s important we point out that patience and self-control are two items on your list on what to look for in an investor.
Someone with a temper is unlikely to be a good match for you and your co-founders. You already have enough on your plate, you can’t afford people yelling at you or getting angry with you.
Investors should be able to think long-term and see “the bigger picture” of your startup’s growth trajectory. They should also “be calm and relaxed” not the panicky type who throws a fit or falls into a frenzy when your startup suffers a bump, notes Addicted2Success.
Further reading: 5 Common Cash Flow Planning Mistakes Businesses Make
6) Investors should have a track record
Sometimes you’ll meet investors who were entrepreneurs themselves a few years back.
In this case, you want to look at their track record as an entrepreneur. Did they help their business grow? Did they exit a successful startup? Or were there constant problems? Did their startup struggle and fail?
This is even more important if your angel investor is one who’ll be offering you guidance.
Moreover, if they have a large investment portfolio, you may want to see how their portfolio has fared over the years.
Further reading: Need Funding? Learn How to Answer These 15+ Questions Investors Ask Startups
What to look for in an investor: Series A and beyond
While the above mentioned elements work with every potential investor, here are a few more tips or elements to consider with Series A and beyond.
Starting Series A, you’re more likely to consider VCs and other types of investors and funding options alongside angel investors.
Signing on with a Series A lead is the beginning of a 10-year relationship,” explains Y Combinator. It adds: “If all goes well, that’s how long your board member will have a say in your company.”
The global accelerator further advises startup founders to “optimize for your board member, not vanity metrics, like valuation.”
Here are a few more tips about choosing the right investor (Series A and afterwards) from Y Combinator:
– Look for investors who can keep a distance
The “best investors are experienced enough to know how to keep [a] distance [and] share their relevant experience in specific areas,” stresses Y Combinator.
Having investors who can keep that distance can ensure a better investor-founder relationship and a smoother workflow for you.
– Look for ‘do no harm’ investors
What this means is you should look for investors who are patient and clear on expectations and your relationship.
‘Do no harm’ investors are also those who will keep that distance we were talking about. They won’t force you to jump the gun and get things done before your startup is ready.
– Look for investors who can qualify as board members
Your board members are people who have the company’s best interest at heart. These are people who are more likely to focus on business needs and interests as opposed to personal interests.
– Ask for references
Y Combinator advises founders to ask for references when searching for or talking to investors. Talk to founders who have received funding from the investor you’re in talks with and learn about their experiences.
Also talk to founders who had gotten funding but failed or went through a rough patch. How did the investor(s) handle it? How well or how bad do they react?
Final words
Your relationship with your angel investor is a two-way street. You want to get funding but at the same time your funding shouldn’t come at the expense of your startup.
To help your business grow, you and your investor – or investors – should be on the same page.
“Raising money from angels and VCs is far more about what they can do for you besides the money. The money is just a tool that ties you together and gets them invested in your success,” stresses venture capitalist Clive Butkow in an article on VentureBurn.
Need help with investor-related services such as creating a business pitch deck, cash flow plan, financial models, and more? Get in touch with Stride.
