Lesson 6: Finding Investors The Right Way

How to Find Investors the Right Way & Wrong Way

You signed up for this accelerator first and foremost because you want to learn how to fundraise the right way. Good for you. In fact, congratulations for making this wise choice. We admire you because it’s one that very few entrepreneurs make, considering how important fundraising is to the launch, growth, and success of a company.

Make Or Break?

Fundraising can make or break you. And most start-ups will need to fundraise at some point of their journey since cash will often be unavailable to get things off the ground. How start-ups go about this process can make a world’s difference on the trajectory and outcome of their fundraising efforts.

Some entrepreneurs are effective administrators who know how to make the most of their limited resources. This mindset is highly beneficial for fundraising. Then there are those entrepreneurs who lack discipline with money and end up throwing it at any problem that arises. Often, this is a problem we will discuss through the course of this week’s lessons.

But fundraising itself is a high-level concept that must be narrowed down to its most fundamental unit: investors. You can go out and try to fundraise here, there, or anywhere you wish, but if you aren’t reaching the right investors, your whole effort will be in vain.

There is such a thing as a bad investor. In fact, the history of start-up world is filled with tragic tales of would-be successes that failed because of the involvement of terrible investors. But instead of focusing this entire lesson on bad investors, we will show you how you should go about finding investors the right way.

Not All Investors are Created Equal

Investors all have different specializations, needs, and preferences for the investments and founders they work with. The first step in identifying potential investors is to identify who you are, what you are selling or building, and your market. Familiarize yourself with how investors think and categorize their deal flow. This course includes a basic primer section, but Crunchbase, Pitchbook, and Insights are also great places to explore the nomenclature of founders and investors.

Be able to talk the talk before you can walk the walk. Once you really understand the words and industry jargon, you can figure out what you are in relation to what they are looking for. Are you a seed stage, Fintech, B2B start-up based out of the Southwest United States? Are you early stage? Late stage? Are you a marketplace? Service provider? Hardware vendor? What is a unicorn really?

Who Is Most Likely to Invest in You?

Figure out who you are, so you can find out who’d invest in you. Finding out who’ll invest in you is as easy as going back to Crunchbase, Pitchbook, or Insights. You’ll find names and networks there. You’ll find other start-ups, and you’ll build out your knowledge base. Learn anything and everything about your niche, and you’ll have a greater understanding of the whole ecosystem. You’ll see natural fits, and maybe even find the investor you want to be your lead.

That’s the other piece of finding investors. What kind of investor are you looking for? A lead? A Co-Lead? Or just a co-investor? Do you want active or passive investors? Do you know what those terms mean? Have you asked your investor what they want and are looking for?

These questions also give you a way to vet investors and figure out if they’re right for you. Remember, position yourself as the aggressor, the one in control and dominating the conversation. Ask questions in a way that makes it, so you are vetting them on the opportunity to be a part of something big, not just that they are vetting you to be a part of their portfolio. Some other questions you can ask are: How many investments have you made recently? How many companies are in your portfolio? What’s your average check sizes?

Be Cautious

Be especially careful with angel investors. Some of them call themselves angel and have only invested a few thousand dollars into a handful of companies or none. You may even be their first investment. Many don’t invest often, but they will take meetings and waste your time. Some, even if they invest, may be a “regret” investor once the “shiny new object” feels washes away, causing you headaches. Others may not be sophisticated enough to understand what they invested in. And some don’t have the risk tolerance to handle the ebbs and flows of start-up life, causing headaches.

Remember, as a founder, you don’t have time or energy to waste; trust me we’ve wasted enough for all of us, and you want to learn from our mistakes. Every hour spent vetting investors to find the right one might save ten hours of worthless meetings. You want to spend your time with the right investors or building your company. Invest in vetting and researching investors.

Where to Find Investors

Investors usually live and hang out in big start-up hubs like San Francisco or New York City, areas where start-ups have had exits, and people have made money from start-ups. If you’re not from these hubs, it gets tougher to raise money and recruit talent, but it’s still possible to build and launch a successful company. Investors can also be found at accelerators, other start-ups, and quality start-up conferences. These are the places to look if you’re not in the “right cities.”

We stay focused on quality start-up conferences because there are a lot of pointless ones out there now that just charge huge sums of money and provide little value beyond lining their wallets.

Research into conferences and find the ones with a good legacy, background of start-up successes, or ones that have excellent attendees. You can find these because they list multiple major investors, venture firms, or family offices attending. Don’t focus on the speakers; they’re irrelevant. You want to see who is attending to determine with whom you can mingle and network.

One place that investors don’t spend time is co-working spaces. They might be fine for office space, but don’t see a co-working space as a gateway to investors. It won’t be. Co-working has become more of a place for companies to sell to each other so you’re more likely to meet investors at an accelerator.

Here is the ideal first-time fundraiser from a VC perspective: went to an Ivy League school, comes from a rich family, lives in a VC hub, is part of the right organizations connected to the right networks, has worked in a start-up, or failed in a business. That last one might surprise, but someone who has never had failure can be a concern to investors.

People who have experienced failure and come out the other side are resilient and understand how to deal with hardship. They’ve also learned things “not to do.” The VCs don’t want you to have blown hundreds of millions in investments, but if you’ve failed at a small business, it gives you seasoning. Not all entrepreneurs fit the ideal. This means you must be more creative and work harder. It doesn’t mean it’s impossible to raise money.

How to Talk to VCs

Now, how do you talk to VCs? Like they are in the sixth grade. Never assume they have the knowledge or the experience to understand you or your business. You’re the expert and only you will give them the basics. We’ve mentioned industry metrics and key performance indicators, KPIs, in some form before. This is where they’re useful. You could spend 30 minutes explaining why your idea is innovative, or you could say that your company beats the industry average by a wide margin.

Imagine you’re a solar panel company and you have an innovative new technology. You could spend hours going into the technical details of your technology with all the science and engineering. You might walk out of there with an investment if you are talking to an expert. More likely you’ll put them to sleep with your jargon; they’ll thank you for the meeting, and you’ll miss an investment opportunity.

Now if you tell them that your solar panels work at 97% efficiency eating light and creating power, and the industry average is in the low 30%, you’ve raised eyebrows. That’s an extreme example, but if the average was 32% and you were doing 40%, investors would take notice. That’s the information people respond to.

Basically, “we beat those guys by this much” is what you need to say. If you are doing something nobody is doing and you don’t have a lot of comparative KPIs, then frame it as a benefit for them or society. For example, no one is doing self-healing roads. To pitch that your investors would mean talking about self-fixing potholes, government infrastructure expense, and the associated taxes. The only thing that matters about how the technology works is that it DOES work, and it’s workable in the real world, and not just in an ideal setting. Don’t try to pedal vapourware!

You will still hear “no” a lot. But not all “Nos” are created equal. Some varieties of no from investors are: No, I’m not in this space. No, I don’t have the money; sometimes this is followed by “yet.” No, not now. No, waiting for the market. No, since I don’t know you. No, I want control. Some of these can be overcome. Some of them SHOULDN’T be overcome.

Some of these No’s are a timing issue or relational. You can wait, keep in contact, and bring up the investment again later. Other No’s won’t lead to future investment. But you can ask for feedback or a referral. NEVER be afraid to ask for a referral!

Referred by an Investor.

You don’t want a referral from an investor that would invest in you. Meaning, if the investor is in your space for companies your size, and so forth, you don’t want them giving you a referral. Because the other end of the referral would wonder why the investor passed. You want the investor referring you to have passed for structural reasons, like different industry, or they focus on later stage start-ups.

Some investors may be hesitant to refer you. In that case, the double opt-in will usually work. The double opt-in means that the investor asks their contact if they are open to a referral. If their contact says yes, then they’ll make the introduction. This is instead of just shooting a group email and introducing you in the first communication. Warm referrals are important. Every big check we’ve ever closed has been via referral.

Ask for Feedback

The last way to turn a “no” around, either into an investment or into at least a relationship, is through the feedback we discussed before. Ask for advice and feedback. You can be direct with these questions once you get past their initial hesitancy. Ask things like, what would it take to convert you into an investor? What KPIs do you need? Do you need more traction, or would you recommend a fundamental change?

Commitment Level

Last, choose investors that will have the involvement level you want. We’ve preferred investors that will help entrepreneurs build teams and manage growth, but we don’t want them to give out advice on day-to-day decisions. Keeping your investors at the strategic level for advice makes things easier. And it also makes them feel more comfortable with their investment in you, which may lead to them investing again. You need to figure out what works for you and for your company at the stage you’re apt to find the right investors.