Finding the Right Investor for Your Early-Stage Company: 6 Things to Look For
The relationship between founders and investors is just that: a relationship. And just like any other relationship, its success or failure depends on a dizzying array of factors.
That’s why finding the right investor — or, more likely, investors, plural — for your early-stage company. A poor fit could threaten everything you’ve worked toward, not to mention the livelihoods of the people banking on your success and the capital you’ve invested to date.
These seven investor attributes aren’t all that’s needed to achieve a good fit. Nor do they guarantee success, however you and your investors choose to define it.
They will help you avoid investors that clearly aren’t right for your company. Figure out which matter most to you and your enterprise and use them to screen out investor candidates that won’t help you get where you need to go.
1. Deep Industry Expertise
It’s unreasonable to expect every investor to know more about what your company does than you do. It’s not unreasonable to expect every investor you work with to have deep knowledge of your industry or sector.
Let this be your first investor test. It’s easy enough to measure, as investors themselves typically make no secret of their areas of expertise. Peruse investor databases like Crunchbase or AngelList and you’ll see this firsthand — if not explicitly, then in data about your targets’ participation. The Crunchbase profile for Andrew Nikou, a private equity investor based in California, is a great example — showcasing Nikou’s investment in personal finance and financial education startups.
And if it’s not clear whether an investor that ticks the other boxes here is an expert in your field? It never hurts to make contact and ask.
2. Experience With Early-Stage Enterprises
Early-stage investing is a very different beast than late-stage investing. If your company is not yet profitable — or, worse, pre-revenue — you’re not going to attract a great deal of institutional attention. Your first funding round or two (or more) will likely involve angel investors and risk-tolerant VCs that aren’t so concerned about the bottom line (yet).
To find suitable partners, look to early-stage investor hubs like the Angel Investment Network, a country-specific database of mostly independent investors (often high net worth individuals) willing to take a chance on bold ideas.
3. In-House Business Development Capabilities
Early-stage expertise and in-house business development capabilities often go hand-in-hand, though you shouldn’t expect every independent HNWI to deliver (or even promise) plug-and-play scalability. If you don’t have the resources to scale entirely on your own, avoid hands-off investors that expect you to “figure it out.”
4. A Complementary Portfolio and/or Network
Investors with substantial experience in specific industries tend to build portfolios weighted toward that expertise.
This doesn’t mean you should gun for investors in your closest competitors. They may not want anything to do with you, anyway.
It does mean you should target investors seeking synergy, particularly when those investors are willing to pay a premium for it. Even if you don’t benefit from portfolio synergy on the front end, this strategy could pay off later, if and when the investor buys you out in full for a clean exit.
5. A Reasonable Resource/Target Ratio
There’s a fine distinction between prolific investors and overwhelmed investors. This distinction isn’t always easy to spot upfront and may only become apparent after the deal is done.
For this reason, it’s best to avoid overstretched investors altogether. An unsatisfying if reliable rule of thumb: Steer clear of small shops with too many buns in the oven.
6. Appropriate Risk Tolerance
You believe in your company, but you can’t begrudge investors that aren’t willing to take a chance. Early on, you’ll need to limit your search to investors that don’t expect to be made whole. That means some combination of angel investors and — if you’re so fortunate — quasi-benefactors within your personal network.
Find the Right Fit
It bears repeating that these attributes don’t add up to any sort of investor “secret sauce.” Working with investors that tick all these boxes won’t transform your enterprise into the next unicorn or even guarantee that it survives until the next funding round.
Instead, think of these attributes as screening criteria. One or two might not be fatal when mixed with other positive characteristics. But too many, or any at all in the wrong combination, should serve as a red flag.
Finally, don’t forget to listen to your gut. Investors can look great on paper, and even come off well in the room, and still not be the right choice for your company. When in doubt, rule them out.