A Complete Guide to Finding the Right Investor for your Startup
Finding investors who match your profile, needs, and expectations is the goal.
Securing funding for the current round or stage is a critical step in any startup’s development. As a result, the search can be long and fruitless because many startup founders seek out VC money without ever considering whether or not it is what they really need.
Finding the Right Investor for a Startup
To begin the process of vetting potential startup investors, you must first gather a list of those you believe will be a good fit. Visit the websites and social media profiles of the selected investors to learn everything you can about their investment criteria.
When it comes to finding out more about a company’s business model and current portfolio, it shouldn’t be too difficult. As a result, your networking skills will come to light if you are good at obtaining such information through third-party channels. It is important to check the company’s reputation and the preferred stage of development.
Overview on Startup Funding
Companies in their early stages often have difficulty procuring the capital they need to grow and prosper. A company just starting out may not be making any money at all. It is clear to them that they must first develop, test, and market.
To do this, startups will need a significant amount of capital, and they have a variety of options for raising this capital from investors. Crowdfunding, angel investment, winning contests, venture capital, financial bootstrapping, and applying for government capital are just a few of the popular ways to raise startup capital.
Types of Startup Funding and When Should They Be Use
There are a variety of ways to raise money for a new company. Regardless of the type of funding you receive, you will never receive the same amount of money twice. Consider your current situation as you read through the following descriptions of startup funding options and investors requirements:
- Small Business Loans – In terms of funding, small business loans are by far the most common. Small business loans are a lot like personal loans in that you’re approved for a certain amount of money and then charged interest on it. Small business loans can be obtained from various sources, including banks and other financial institutions that you can locate through the Small Business Administration (SBA). Make sure you have good business credit before applying for a loan. You’ll be able to get a larger loan for a lower interest rate, which will save you money over the life of the loan.
- Revenue-based Financing – Companies in the Early Stage who are able to generate revenue with high gross margins consistently are good candidates for this type of funding. One of the most common ways to raise money is to give up a fixed percentage of future profits to an investor in exchange for upfront capital. Revenue-based financing is an option for business owners who don’t want to dilute their company’s equity further. Due to the fact that repayments are made every month, however, you may find yourself with less money in your bank account each month.
- Funding Rounds – It’s common for startups to go through a series of funding rounds where they look for various types of funding. Series A, Series B, and Series C funding are all lumped together, and each corresponds to a different stage of the company. A return on investment is expected from startup investors in every funding round, as money is typically exchanged for company equity. It may be necessary to raise money in order to launch your business, fund important marketing efforts, or get your product to market.
- Venture Capital – There is a type of private investor known as a venture capitalist (VC) who invests in promising new businesses. As a general rule, venture capitalists work for a larger venture capital firm. These companies frequently have boards of directors who vote on which businesses to support. If the venture capital firm selects the company, a VC will make a funding offer. When venture capitalists buy stock in a company, they typically expect to receive a return on their investment if and when the business is a success. However, if your business fails, the VC will receive nothing in return for their money.
- Angel Investment – Aspiring entrepreneurs and small business owners can rely on angel investors for financial assistance. Angel investors, unlike venture capitalists, tend to operate on their own and are not tied to a particular company or board. Even though angel investors aren’t VCs, they still expect a return on their investment, as they’ve purchased some form of equity or ownership in your business. There are times when angel investors can be left out in the cold, just like venture capitalists (VCs). So they’re a better bet than a traditional business loan because they’re safer. However, keep in mind that you’re exchanging your equity for the funding you require. Having an investor means that you may no longer be able to run your business on your own terms.
- Crowdfunding – Crowdfunding is a viable option for many people who have an idea for a business but lack the capital to make it happen. Private backers (individual investors) buy your product or service before it’s available through a crowdfunding model. This enables entrepreneurs with a business idea to raise money for their venture in exchange for the right to provide their backers with the requested product or service. Crowdfunding can be done in a variety of ways. Still, the most common method is through crowdfunding platforms like Kickstarter or Indiegogo, which allow people to raise money for a specific project. There are many ideas to choose from on these platforms, and users can back the ones they’re most interested in.
- Venture Debt – Entrepreneurs who already have a venture-backed company can only apply for this type of funding. In other words, venture debt funding is a loan that you must pay back, regardless of whether the company is profitable or not. The length of time it takes to pay back a loan varies; it takes three years on average. Venture debt is an excellent short-term financing option when a company needs to make a one-time purchase but does not have the cash on hand, such as a retailer restocking for the busy holiday shopping season.
- Incubators/Accelerators – Incubators and accelerators offer a variety of advantages to businesses in the early stages of development. In most cases, if your company is accepted into one of these programs, you can expect a cutting-edge working environment, business mentoring, strong industry connections, and seed funding for the most promising ventures. Due to the high level of competition, getting accepted into a startup incubator or accelerator is nearly impossible. Many of these programs don’t promise money; instead, they provide mentorship and other resources to help business owners grow their enterprises.
- Private Equity – Private equity firms are part of the private sector and invest in startups and small businesses by acquiring a stake in the company. Large third-party investors, such as universities, charities, pension plans, and insurance companies, are common sources of capital for private equity firms. Private equity investors buy a publicly-traded company and turn it into a private company. As a result, you will be the sole owner of your company’s profits. Basically, a private equity firm has the ability to acquire your business.
- Bank Loan – A traditional bank loan can be a useful financing option if you can get a good deal. The lowest interest rates and no equity in the company are typical of bank loans for business start-ups. In order to obtain a bank loan, you must go through a lengthy application process and have a high credit score. Banks sometimes require personal guarantees in the most extreme cases. In the event of a repayment default, they will be able to recoup their losses from personal assets.
How is the Fundraising Structured?
A typical seed round may include one to three angel investors, as well as a lead investor who often contributes at least one-third of the round in the early stages. As the lead investor, this person sets the round terms and ensures that all other startup investors are aligned on important items such as the valuation, preferred shareholder rights, and deal terms.
It’s common for the lead investor to play an active role in your company’s future strategy, helping with executive hires, director-level board work, and key introductions to future funding rounds.
How to Find the Right Investor for a Startup?
You may think you’ve found all the investors you need, but you owe it to yourself to keep in touch with them until you’re sure you’ll get along. There are a few things to keep in mind when looking for investors for your fundraising:
- Choose the investor that meets your requirements – The strength of your startup can be built or shattered by the quality of your investor team. It’s not just money that investors can bring to your company; they can also help you organize, market, and implement your ideas. A new entrepreneur needs to know what to look for in an investor and how to attract the right kind of investors.
- Attract investors with the best pitch – You need to detail exactly how much money you need to invest and how much you expect your return on investment to be. You need to know how much you’ll incur and the demographics of your target audience. It’s also important to understand how you intend to market your product or service and how you envision your startup’s future growth. As a rule of thumb, keep your sales pitch to a minimum. Prepare a visual storyboard or PowerPoint presentation with no more than 10 to 15 slides. Make sure your presentation is no more than 20 minutes long and that your content tells a compelling story. Don’t read your presentation word for word; instead, use it as a guide. Keep in mind that your pitch deck attracts your investors.
- Look for industry and functional expertise – What is the background of your investment partner? As a general rule, it’s a good idea to look for investment partners who have some experience in your industry. These investors should be well-versed in the history of the industry, the current market forces at play, and the future prospects for the sector. To address the market and steer clear of pitfalls, investors who have experience in your industry are a valuable resource. A functional expert is an investor who has mastered some or all of the foundational skills of entrepreneurship and fundraising. Investors need to know what they’re doing if they’re to help your business grow further.
- Get an accurate business valuation – It is possible to arrive at an accurate valuation by simply negotiating for a stake of 15-20 percent in the company in addition to your investment. Investors at this stage are generally looking for evidence that the company can generate a 10x return within the next five to eight years. In the early stages of a company, there are many ways to determine the value of a company, but the most common method is to look at similar deals. The analysis must take into account the same industry and local operations as well as the recent funding of companies and the sales/exit amounts they generated.
- Look into their networks with other companies – You can find potential partners, talent, advisors, and even investors by looking at the portfolios of companies that the firm has worked with in the past. Personal mentorship and advice on how to improve your business plan, operations, and other areas can be obtained through a strong network. Observe an investor’s network size and location, as well as the breadth and depth of his or her expertise in various industries and functional areas.
- Look into their history – On your journey to hunt investors for your startup, one of the greatest tips that would be a great help is to look up their history. Contact the companies your shortlisted investors have worked with and gather their opinions. You can clearly analyze who would work well for the long term.
- Diversification – Few business owners consider the importance of selecting a diverse group of startup investors, each with its own unique set of assets to invest in. Reach, influence, and accessibility are just a few of the many advantages this provides. However, it’s critical if you want to keep your slack and raise money in the future.
- Sealing the deal – After establishing yourself as accessible and trustworthy, you won’t have to go above and beyond to secure an investment. To increase your chances of sealing the deal, follow these steps ahead of time:
- Show that your idea/product works – After successfully running a small business, investors are more likely to put their money where their mouth is. The best way to demonstrate that you are committed to seeing an idea through is to get it moving and achieve small successes along the way.
- Invest in your network of friends and associates – There is a potential investor in every person you meet or a contact who can point you in the right direction. This is something I can attest to from personal experience; I’ve seen it time and time again.
- Make people like you – If investors don’t like you, it’s impossible to raise money. Make eye contact and smile at everyone you meet. Positivity radiates from the inside out.
What to Avoid While Finding Investors for a Startup?
Knowing what to avoid in an investor is just as critical as knowing what to look for. Term sheets that are too long are a common source of missteps.
The nature and value of an investment are intrinsically linked to its term sheets. As a rule, raising a price round can take a while. This can lead to a discrepancy between the valuation you want and the valuation you get from an investor because term sheets can be hundreds of pages long. Consider the following when reading a term sheet.
One of the most important concerns you’ll have as a startup founder is finding sources of funding. But it’s just as important to know how to select them. After all, the two of you will be working together for some time. In order to get the best return on your investment, you should think about the type of investor you want and conduct some research and outreach to find a good match.
Need Help In Attracting Investors to Your Startup?
One question most startups have is “what does an investor look for in startups?”. Your startup’s success or failure is largely dependent on the quality of your investors. And one way in making sure you attract the right investors is to get a business valuation done by expert analysts. With Eqvista, you are guaranteed a hassle-free business valuation conducted by NACVA certified professionals. To learn more about our valuation services, please don’t hesitate to contact us.