As a founder, once you have decided to fundraise, the next question to ask is -Who should I raise the money from? What is the approach I should adopt for my fundraising strategy?
“Who you should raise money from” is a complex question. I personally think finding the ‘right’ investor is overrated by founders. The assumption that finding the ‘right’ investor will be the manna from heaven for your venture is a misnomer. Remember, as a founder, this is your only venture. For an investor, you are one of his investments. That says a lot in terms of a founder’s expectation from investors.
This does not mean that we go without a plan when we start fundraising. This will probably be one of the most important decisions for your venture – as not finding the right partner could make the journey of building the startup even more stressful. It is important to create a well thought out approach, keep enough time to ensure you can meet the right people and make the right decisions.
Step 1: Understand the different profiles of investors
Investors and their investing patterns can be divided into 3 categories:
- A Lead Investor: Someone who is willing to “lead your round”. By leading we mean
- Investor who can set the terms of investing for your round (not just valuation but also the terms being agreed by all the investors in the round)
- Investor who represents the rest of the investor on the board of the company (if the investors get a board seat), and can possibly take the Power-Of-Attorney (PoA) of the other investors in the round
- Investor who will work with you after fundraise to review your milestones, attend board meetings and be available to spend time if needed, to help you build your venture
- Active Investor or a Validator: This is someone who is the thought leader / domain expert in the space you are building your venture in. This investor could be an industry influencer, or a brand by himself, with enough brand power to help you bring in other investors and create validation for your business, from an investment and business perspective.
- Follower: They are the investors who are new to angel investing, or to the ecosystem but are willing to back your venture with capital (and this is highest risk form of capital)
I have seen entrepreneurs want their investment from ‘only’ active or marquee investors on a preferred basis. Ask yourself this question before you take this strong approach: Will I be able to extract enough value by having 10-15 investors who are all active investors and brand names? As an entrepreneur, if you are building something valuable, you will have little time to keep all your active investors engaged, and eventually, you will find yourself only engaging with few of the investors, based on the support you are looking for.
Step 2: Do your homework for your lead investor
Talk to friends who have raised funding for their ventures. There will always be learning’s, from founders who have been through this process. And there are no rules in how you engage with investors. Treat this relationship like how you would treat your customer. Win the trust and the confidence before you ask for investment. This is probably almost like hiring a key employee in your organization. And I always maintain that finding the right lead investor is probably the most important part of fundraising and ongoing governance for your venture.
Finding a lead investor could take anywhere from 4 weeks to 4 months. The lead investor would want to meet you face to face, do some initial DD on your venture and have a working comfort with you and your team.
Step 3: Match the Investment thesis of investors with your preferences
Investors who are actively investing have a good investment thesis and sometimes a well-defined anti-thesis too. As a founder, you must understand this, as well as ensure you are not approaching an investor who might have invested in a competing space. This becomes important, as you don’t want to be held back in your discussions with an investor. At the same time, there could be instances when an investor invests in a competitor after his investment in your startup. This is a very real scenario.
Step 4: Chemistry and alignment of vision trumps it all
Having a good chemistry with your investor, and be aligned with what the higher goal of the venture is the foundation of choosing the investor. This is especially true for the lead investor and some of the marquee investors. You have to be very comfortable having a difficult conversation with your investors. You have to like and be liked, as this is an important relationship and needs to be nurtured with mutual respect and trust.
Some rules on fundraise and engaging with investors:
- Treat your fundraising like a sales process. Treat the investor like a customer.
- Give the process enough time – so, plan ahead to ensure you are putting your business on the critical path.
- Track conversations and interest. Be honest with yourself and know when an investor is interested and when he is politely refusing to engage. This is an important distinction to make to ensure your time if well utilized.
- Use the process of fundraising to get market validation. Listen to feedback on your product, your team and yourself. It is important to listen. How you choose to act on the feedback should be decided after the meeting.
- Be honest in all your conversations. Getting the investment is only the first step. The real test of entrepreneurship starts post this.
The final most important rule is don’t assume you should approach every network, every friend and attend every event while you are fund raising. Data has shown that startups who are visible every where reduce their chances of fund raise easily as there is a perception being created that you are not able to get investor interest quickly. Perception defines value and value influences investor interest. This seems counter intuitive but that has been my biggest learning over the last few years.
This article was originally written by Shanti Mohan, co-Founder, and CEO of LetsVenture. If you are a founder looking to fund raise, write to me on medium or twitter (@Shantimohan). I am happy to have a conversation!