How To Choose The Right Investors for Your Startup [with Examples]

I have been involved with startups for the past couple of years and one of the most frequent questions that came to both my mind and in entrepreneurship community discussions is how to choose an investor. This is a two sided question, as both you as an entrepreneur and the investor must find common ground on most things to share resources – their money & influence vs. your company and future success.

So for the entrepreneur, it’s a process of research, pitching and due diligence, while for the investor it’s a process of deal sourcing, evaluation, investor branding, network and due diligence. Both sides need to do a lot before any deal even begins to travel through the pipeline. Since I value the experience of others, I pulled the best advice from several online forums & communities to cover the top criteria on how investors and entrepreneurs choose eachother.

It’s very much like marriage – successful ones always are backed by lots of work, lots of getting to know eachother, bad ones are spontaneous and crazy.

Jason M. Lemkin said on Quora that the entrepreneur should focus on what they need according to the stage they are in. In the early days, you will look at:

  • Help scaling from nothing to something.  An investor who’s actually done what you’ve done for real can help you here 10,000,000x more than someone that hasn’t.
  • Help getting at least 1 great hire.  Can the investor help?  Hiring is always impossible.
  • Help with the next round.  This should not be underestimated.  Is the investor someone VCs like to follow?  For real?  And will he or she be able to help here?
  • Help with PR and promotion.  Most investors can’t do this.  But some can.  This can help.
  • Help making you seem Hot (or at least, Cool) before you deserve it.  Few can do this.  But it’s super valuable.
  • Help being a true mentor.  Related to the first point.  Very few can really do this.  But if you can get someone to really help you be a better CEO — this is worth its weight in gold.

Forbes.com, in a recent article, focuses on 4 key questions:

1. Do you click on a personal level?
2. What can they bring to the table?
3. What have they invested in before?
4. Do they usually do follow-on rounds?

While the first one is a no-brainer, given that you’ll be working together for several years, the second question is often overlooked when money shines bright. Look beyond the cash and check the points made by Jason Lemkin, check expertise, experience, network and resources. They will end up being more valuable than the cold, hard cash.

Here’s another great piece of advice from Entrepreneur.com backing what I just said:

Cohen: They should make introductions for you to other investors, customers and partners. They should be asking you what your issues are and how they can help. With my companies, if I know what your top three issues are on a regular basis, I’m happy.

Cnet.com had a piece about this from a few entrepreneurs that went through the successful investment process (the bold part is my choice):

“Pick investors who believe in you personally and who you feel you can be open with,” said Danielle Morrill, Referly co-founder and former director of marketing for Twilio. She advises companies to find investors they can trust and won’t abandon a business when it’s going through rough times.

Sales-Griffin’s final note is that it should never be about the money. “The real value is in the regular hands-on advice and strategic support,” he concluded.

Christopher Mirabile said on Quora that not all investors are created equal and went on to name several categories of sins related to investor behaviour. Helps a lot to have a red flag checklist when going through the hoops, although I don’t agree with him on all the points or the severity of them. Here’s a selection:

Deal-breakers:

giving you bad advice and insisting you follow it
lacking, honesty, honor, integrity and good common sense values
being bigoted, sexist or likely to harass or disrupt members of your team
being unable to make up their mind on whether to invest (or what strategic course to take) and always wanting another meeting

Red flags:

insisting on a board seat but having no value to add
failing to understand or keep current with the company’s technology or positioning in order to represent the company well
not being able or willing to introduce you to other investors or customers, failing to actively support and “talk up” your company, having no network or connections or networking skills to help you build the team
lacking business fundamentals or experience with sales, taking a lot of your time and requiring a lot of hand-holding
insisting on dilutive advisory shares or consulting fees for no, or dubious, value
being unpleasant, close-minded, inflexible and generally difficult to get along with
lacking knowledge of how to structure a round, lacking knowledge of how to stage capital into a company

And last, but not the very less least, Mikko Asaarela put together a very comprehensive list of questions investors should be prepared and expect to be asked.

1. Could you refer me to entrepreneurs who you’ve worked with who highly recommend you?

2. How many Founders/CEOs have been fired by the board from your portfolio companies? Can I talk to them? 

3. How much return have the entrepreneurs seen from exits in your portfolio?

4. Can I talk to the founders of failed companies in your portfolio?

5. What kind of follow-on investment do you think the company needs to succeed?

6. What is your end game?

There is no quick win or recipe for success. Every company and every investor are different, so go through the process of getting to know each other, research online and offline, ask tough questions and work on your personal / investor brand beforehand. It helps speed up the whole thing.

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