Get expert advice on every topic you need as a small business owner, from the ideation stage to your eventual exit. Our articles, quick tips, infographics and how-to guides can offer entrepreneurs the most up-to-date information they need to flourish.
October 17, 2018 | 6-minute read (1031 words)
“As much as the VC (venture capitalist) is doing diligence on you/your company, it's important that you do diligence on them as well.”– Gadiel Morantes, EGFS President
Watch an episode of Shark Tank and you’ll see that the investor doesn’t simply choose the startup. Sometimes the startup has to choose between two offers, sometimes the sharks make joint offers, sometimes the startup walks away from an offer, and of course, some get no offer. Like an employee-employer relationship, a candidate is pitching their skills and talent, but ultimately both parties have to decide if there’s a match.
The amount of the offer is not always the deciding factor. Because if it were just about money, venture capital would be more like a glorified business loan. Investors bring different types of value to the relationship. If you're pitching your startup to investors, you must understand the VC landscape and who will help you scale your business best.
Investing your time wisely
When you are getting started, it’s good to participate in pitch competitions and other events where you can talk about your business to a room full of people. There are many opportunities where VCs or angel investors will be in the room, but you may or may not get this information ahead of time.
Take advantage of situations where the pressure is off because you are not pitching and get advice on how to develop your story. Building relationships with investors who can make introductions or help you prepare your pitch is the next best thing to receiving funding. Still, at some point you will want to target VCs instead of casting a broad net.
While you’re fundraising, you will also be working on your business. It is critical to be selective with your time when it comes to one-on-one meetings with investors. Do your homework before you spend time pursuing an investor who doesn’t invest in your space or with companies at your stage. The same way you target your customers, you can target VCs based on the value they bring to the relationship and the likelihood that they’ll invest in your startup.
Investors bring more value than just $$
You want someone who can help you see your next move, because they’ve seen so many others traveling a similar path.Ways to evaluate VCs
How do you prevent over-investing your time pursuing a VC that’s not a good fit? We’ve outlined a few methods that can help you get started. Eventually you’ll develop your own vetting process. Start by not over-investing your time in this research! You don’t need to do an FBI-level investigation. You need to decide what your “must-haves” are before you initially pitch. Then, over the course of a few meetings, learn more about each other and determine if you’ll be good partners in scaling your startup. The dating analogy still applies.
Tier/Reputation
Location
Continuing the relationship analogy, once it’s official, you might as well be married. Even with in-person meetings becoming a thing of the past, you don’t want to be too many time zones away. The challenges of setting meetings can be a big hindrance.
Look for someone who is based in the same region if you can. Keeping it local means you can catch up over coffee or meals, which is great for relationship building. As Marc Andreessen said “Where is the startup located? Can it hire the right talent in that location? And will I as the VC need to drive more than 20 minutes in my Mercedes SLR McLaren to get there?”
It also means facilitating introductions will be easier. Being part of their network can never be underestimated or duplicated by the investment alone.
Focus
How diversified is the VC you’re considering and are they targeting your specific solution area or industry? If you are strictly a software solution, it is not worth spending time targeting a hardware-focused VC.
They should have a clear understanding, if not a presence, in the sector you occupy. If you have to translate too much information, it’s not the best fit.
At the same time, it is not wise to pursue VCs who are working with your primary or secondary competitors. Taking the chance of idea leak occurring – even with an NDA in place – is just not worth it. Plus, as entrepreneur and angel investor Dan Shapiro said, “Good investors feel a strong obligation to their existing portfolio.”
Communication Style
Talk with other companies working with your targeted VC to get a sense of what their dialogue style is. Often it takes one of three paths: the mentor, the observer, or the confidante. Get clear on how it will go when things get tough (and often emotional) in the business.
Mostly importantly, choose a VC that is aligned with your vision and understands (or wants to understand) your space, because they will become part of your company. Being well-aligned and clear on what each other’s expectations are key to a successful investor-startup relationship.
Questions or Comments? Reach out to EGFS
Follow Us: @EarlyGrowthFS
Accounting
Finance
Learn how we can put more time back in your day.
