To find the right investor: 5 key steps

To find the right investor: 5 key steps

Fundraising - a complex process, and it is very important to start with choosing the right investor

Fundraising for a startup is one of the most exhilarating and nerve-racking experiences for an entrepreneur. At the outset, the world seems like an open oyster, where many opportunities abound. In the U.S. alone, there are nearly 1,000 VC funds and hundreds of thousands of individual investors, or "angels." With so many options, the mission would appear to be straightforward. Alas, don't let the numbers fool you. Fundraising in the best of cases takes several months, and if you're not careful, it can become interminable. However, it doesn't have to be that way.

Here are five steps you can take to make the process more productive and efficient.

1. Create a relevant target list.

This is the critical first step. Narrowing your options is key to an efficient process. For a seed round, you'll want to identify funds and individuals who have a track record in the market segment that you're serving. Depending on the size of your round, a good rule of thumb is to create a list of 15 to 20 funds and 25 to 50 individuals who are relevant. Research funded companies that are in your peer group to see who has invested in them previously and whether these investors have a penchant for an opportunity like yours.

2. Avoid investors with potential conflicts.

Once you've created your list, you'll want to make sure that none of these individuals or funds have investments in companies that may be competitive to what you're doing. For obvious reasons, you don't want an investor who may be conflicted, especially one that can hold a meaningful stake in your company and get access to confidential information. The best way to avoid this is to do an online review of their profiles and web sites to see which companies are part of their portfolio. If it's not clear, or there appears to be a "fuzzy situation" (i.e. a startup that does not directly compete but may do so down the line), simply surface the question very early in your first conversation.

3. Find a 'warm' way in.

If this is your first rodeo, it's likely that you won't have existing relationships with many of these investors. The urge will be to contact them through a cold call or email: Don't do it. Most investors come across many opportunities and can be challenged to find the time to evaluate each of them appropriately. The deals that don't come through trusted contacts tend to also be the ones that are ignored or thrown into the trash bin. It's in your best interest to find a common relationship with your intended audience and ask that connection to provide a warm referral. The chances of getting a response and initiating a dialog improve exponentially. These trusted, mutual relationships are around you, you just need to find them. LinkedIn is a great resource for this.

4. Get third-party feedback.

As you're finding different access points to an investor, you may also want to start getting third-party views on what they are like to work with. Do they tend to be active or inactive? Is their involvement additive or a distraction? Do they understand the risk of the investment? One good way to gather this perspective is to connect with a CEO of company in which the investor is already involved. After a couple of these conversations, you'll get a clearer picture. If the investor has a limited history of investments, service providers, like lawyers or accountants, can also be terrific sources to tap into. Doing some online research and reading their social-media feeds are other effective ways to round out the picture.

5. See for yourself how the relationship evolves.  

Once you've made the initial connection, if it goes well, you'll meet again. If it goes really well, you'll have multiple meetings, particularly if the check size is substantial. Keep in mind that the investor is using these interactions to get to know you, understand your make-up and see if you have what it takes to execute your vision. You should be doing the same. Take the time to get to know him or her to ensure that their involvement is what you actually want. This is a bit of a chemistry test for both sides, but ultimately, you want to work with people who are supportive and helpful, in good times and bad. Though it may not appear that way at times, remember that diligence is a two-way street.

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