The Importance Of Finding The Right Investors For Your Startup
Fundraising is a critical part of building a startup for most founders, and the survival of your company often depends on securing growth capital. It can also be very challenging to raise money from VCs and other investors. For example, a top venture capital firm will assess thousands of opportunities per year, which will be whittled down to less than 200 for preliminary due diligence, and then about 20 funded companies. Making sure that you target investors who are a strong fit for your company can significantly increase your chances of successfully raising.
Funding isn’t the only consideration when identifying potential investors. Besides capital, there are several ways investors can provide support to your company and plug existing gaps in your cap table. Certain investors can bring in sectoral expertise, large networks of partners, talent and access to a community of investors they can connect you to for follow-on funding. The luckiest founders have even been able to lean on investors for emotional support when necessary.
How can startups effectively target well-suited investors?
To start off with, you need to make sure your investment proposition is closely aligned with the target investor’s mandate. The key elements to consider before selecting a prospect are:
- The investor’s industry, business stage and geographical focus
- Investment philosophy. This encapsulates a fund’s sentiment towards its chosen market, its thoughts on existing problems in this market and opportunities for solutions
- The investor’s existing portfolio. If they have already backed a company whose solution is in direct competition with yours, outreach may be futile. On the other hand, identifying potential synergies between your startup and an investor’s existing portfolio companies could work in your favour when pitching
- Deal origination preferences. Some investors strictly consider opportunities which come through their network. In cases like this one, cold outreach may likely turn out to be a waste of time and resources. Unless you can get in contact through a referral, consider other investors instead
Founders should also opt for a broader assessment of the sources of funding which are aligned with their company vision. Since VCs and angels tend to be the default options, entrepreneurs miss out on alternative sources of funding like non-dilutive capital from governments and development agencies, funding from foundations or family offices.
How many investors should a startup plan to target for a round
Casting as wide a net as possible will increase your chances of securing funding, but there’s also evidence to suggest that targeting over 100 qualified investors will not have any measurable impact on boosting your fundraising efforts. While you should definitely cap your list at 100, reach out to at least 60 investors.
A good rule of thumb is to group your investors and target one group at a time for outreach. This will help you effectively manage your pipeline, including meetings, follow-ups and other communication with interested prospects.
Using a tiered outreach method also helps you iterate and work your way up to the most compelling pitch for investors. You could take this one step further and use a “reverse investor list” strategy. This approach allows founders to split their targets into batches which are sorted according to the likelihood of conversion and how much you want them on your cap table. Once you initiate outreach, start with the group of least likely prospects, and work your way up to your dream investors. On the way, and using feedback from the lower priority investors, you can continue to tweak your presentation until you get it just right.
Leveraging The FutureList for investor prospecting
The FutureList is more than just a list – it’s a research tool. Powered by big data and analytics, the platform provides curated solutions for your outreach. You can access the database of investors for free, and filter your search to narrow down prospects whose focus and philosophy are aligned with your company. Once you have a shortlist, you can dig deeper. Look at the investor’s portfolio companies. While you may not have the details of these companies, reaching out to other founders who have worked with the investor can provide invaluable insights. This is an often-overlooked strategy that can reveal a lot about the investor’s style and approach
Initiating first contact with investors
Always start by clinching the easy wins. Do you have existing investors you can approach about follow-on funding? These are people with whom you have a preexisting relationship, and who are already sold on the business. If they can’t provide follow-on funding, explore other ways in which they may be able to help, like referrals and warm intros.
Next, go back to the list of target investors you compiled. You can circulate this list between a few trusted individuals in your network, in case they can point out a few strong prospects you might have missed or arrange intros to any of the investors in your list. LinkedIn is a great tool to check whether you have any connections who work at the firms you are targeting. While it’s not a good idea to pitch an investor via LinkedIn, it’s a great place to start establishing rapport with contacts, before moving the conversation to a more appropriate channel. If you don’t have any direct connections, consider asking a close, mutual connection to arrange the intro on your behalf.
Finally, make sure your outreach is personalised for every single investor you reach out to. This makes it easy for both you and mutual connections to sell your company to an investor. Hone in on what you know about the investor’s background and recent activities, and why you’d be a great portfolio company for them.
Parting words to founders embarking on a fundraise
Fundraising is a marathon, not a sprint. The entire process, from initiating outreach to closing the round can take several months. Start early enough that you have adequate runway to keep you afloat during this time. Develop long term investor relations strategies, instead of focusing on once-off engagement. You will often need to build trust and credibility with potential investors over time. In reality this can look like sending updates on key developments and traction periodically before the investor is convinced to back your startup. Be proactive and identify multiple touch points to keep you on an investor’s radar. For example, reach out to congratulate them on positive developments, or interact with their posts and published content to demonstrate your own expertise.
Even in a bear market, it is entirely possible to successfully raise capital. It is a science as much as it is an art. Developing the right strategies, being receptive to feedback and actioning these insights to perfect your pitch will pay off.
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