How to Choose a Startup Investor
Investors can bring a wealth of knowledge, expertise, and a strong network, making them a valuable asset to your company. But, when you take on an investor for your startup, you aren’t just gaining capital — you are taking on a business partner.
Therefore, it is important to be absolutely sure an investor is right for you and your startup before securing your funding round. These are the factors you need to consider when choosing a startup investor.
1. Determine the Type of Investment You Need
The type of investor you need will likely depend on the stage of your business. While there are many different types of startup investors, most startups take investment from venture capitalists or angel investors.
Venture capital firms are a collective of limited partners (LPs) compiling their money into a fund to invest in high-growth companies or larger funds. The types of investors and stages of startups venture capitalists invest in vary by firm and fund.
Angel investors are typically early-stage investors who will take on riskier investments. These are commonly individual investors, rather than a firm, making investments out of their own personal savings.
2. Make Sure They Invest in Your Startup Stage
Don’t waste your time pitching to a startup investor that doesn’t invest in startups at your stage. Not only are you not likely to receive funding from them, but it may not be the right fit for your startup if you do.
Many investment firms deploy multi-stage investments or are stage-agnostic. However, for early-stage startups especially, it may benefit you to opt for an investor that specializes in your stage.
3. Check Their Portfolio Track Record
Does your potential investor or venture capital fund have a track record of backing unicorns that went on to become unicorns? (Or, successfully exit their startup?)
Whatever your goal is, one of the considerations you should make when choosing an investor for your startup is their track record of success and whether it aligns with your goals.
Not only does this give you valuable information about the success of their ventures, it also provides data to ensure your goals will be aligned. For example, if your goal is not a quick IPO, you should assess whether your potential investor’s portfolio is companies with similar trajectories as the one you’d ideally like to see for your startup. Otherwise, your goals will misalign and cause issues down the road.
4. Ensure They Align With Your Values And Vision
In addition to knowing your investor’s track record, you should also determine whether they match up with your startup’s values and mission, as well as the vision you have for the company.
While goals and milestones are flexible, the values you have founded your company are the foundation of the company. Since many investors receive an equity stake in the company in exchange for capital, you want to make sure that your investors align with your values and vision.
5. Prioritize Investors With Experience In Your Industry
There are many benefits to pitching to investors who have experience backing companies in your industry or adjacent to it – one of them being that you know they have valuable experience growing a business in your sector. Another is that you are increasing the likelihood of investment by opting to pitch to an investor who has an interest in your industry.
Something important to note here, however, is to proceed with caution if the experience is with a direct competitor. This is primarily because it can stifle innovation due to bias held by investors from previous experiences. This is not always the case, but it is wise to be cautious and do your due diligence about the investor’s expected level of involvement and potential bias.
Remember That You Are in the Driver’s Seat
Overall, the most important thing to remember when taking on investors for your startup is that you are in the driver’s seat.
Taking on investment for your startup is a huge decision with a lasting impact. Select the investor that best aligns with your startup’s values and goals and that you trust to work as a partner and asset to the vision you are bringing to life.