Investor Selection

Whatever stage your business is in when you launch your fundraising efforts, you can find the investor support that you’re looking for. Now that you’ve determined the fundraise structure that matches your needs and goals, it’s all about finding the investors that make sense.

All investors are not created equal.

They may all have capital, but professional investors tend to have very specific targets for which types of investments they are looking at. They may be very early investors who tend to be the first money in a deal, looking for the biggest return on a small amount of capital. They may be an ex-Founder who made her money in biotech and is only looking for similar industry opportunities. They may be based in your local community and only prefer to invest in that area.

One thing is common – they all have very specific preferences. If you don’t know what those preferences are before you start reaching out to prospects, you’re going to waste a ton of time.

Once you understand each of the key selection criteria for finding your investors, the next step of course is to figure out where to search for them and how to build your contact list. We’ll discuss each of the various sources for finding the best possible investors and how to do some solid investor research and prep.

Startups raise money in a series of stages based on how much growth and evolution they have had.

Think of it like a kid going to school. There’s elementary, middle school, high school and college. Each of those stages represents an evolution of the student, and there are a number of teachers who specialize in helping students at each stage.

Startups are the same way. If you’re just getting started (the Seed Stage) you’ll be talking to different investors than if you have already raised money previously and are in the Expansion stage. These aren’t strict definitions, mind you, but just general epochs a company goes through as they grow.

Investors tend to gravitate toward a stage of a startup’s lifecycle that they are comfortable investing in. It generally follows that the more money you want to invest, the later the stage that you invest.

You’ll notice a bit of a “hand off” between investors and each stage. Friend and Family may invest the first $50,000 because they know you personally, but the next $250k may come from professional angel investors who have more capital to put to work. Later on, if you look to raise $2 million, you’ll likely be talking to venture capital firms who are looking to take on riskier investments, but only once those companies have shown meaningful growth and promise.

The stage of your business pretty much tells you who you should be talking to. More importantly, it tells you who you should avoid talking to since pitching a “Late Stage Investor” with the idea you had last night is going to be a huge waste of time!

Seed Stage (less than $100k)

Friends and Family, Angel Investors, Incubators

Seed Stage is the most formative stage of a startup. Although it typically starts with the idea, the reality is most seed stage startups looking to raise money have more than just an idea – they have already been working on a prototype of the product, have a business plan in mind, and have begun figuring out where they are going to acquire customers.

Seed stage investors tend to be the first money in and often have some sort of connection or relationship with the Founder. The investment amounts tend to be small because the idea is still in its infancy and therefore it is more of a bet on a general concept than an actual company.

Key Requirements:

• Business Plan
• Minimum Viable Product
• Some Customers
• Founding Team

Early Stage ($10k - $1.5 million)

Angel Investors, Venture Capital

Early-stage companies have usually achieved at least MVP (minimum viable product), meaning their product or service is being provided to at least a small test subset of customers, and is meeting with customer approval. Early-stage companies are also often generating enough revenue to be worth talking about, although that varies from company to company.

Key Requirements:

• Functional Product
• Paying Customers
• Early Key Team Members
• Early Growth

Expansion Stage ($2 million - $50 million)

Venture Capital, Private Equity

By the time you are searching for Expansion Stage capital amongst venture capital and private equity investors, it’s clear that your business has major upside potential. You may not have strong revenues yet, but you may have just developed the next Facebook. The investors at this stage are looking for companies that have proven they have found “lightning in a bottle” and just need a bit of a turbo boost to really accelerate.

Key Requirements:

• Significant Revenue ($5m - $50m)
• Huge Market Potential ($100m - $1b+)
• Strong Market Leadership

Late Stage ($50m+)

Private Equity, Investment Banks

Once a company has built a product that’s become a darling in the market, that’s when the Private Equity and Investment Bankers show up. These folks aren’t looking for a lot of risk – they let the angel investors and venture capital firms deal with that. They are looking to put massive sums of money into companies that are already winning to allow them to secure their leadership position. If you make it to this stage – you’ve won!

Key Requirements:

• Significant Revenue ($50m+)
• Market Leadership Position

Whether you need to expand your team, pay for product development, or just feed yourself, at a certain point you may need to seek outside sources for a capital infusion.

Fortunately, there are many different avenues you can take to find funding.

While banks or federal or state governments may be suitable options for some companies, this playbook focuses on a few of the types of investors you can pursue when you’ve exhausted those options, such as friends and family, angel investors, and venture capitalists.

Friends and Family (less than $100k)

While a bank or independent investor might be hesitant to risk money on your venture, your friends and family might be more willing to take a chance on your vision.

With individual rounds typically raising around $25,000 to $150,000, seeking investments from your personal network be an ideal way to raise seed money to get your company off the ground. These close circles generally consist of individuals most likely to feel a strong affinity for your brand -- or, simply, to you -- motivated more by loyalty and support than a return on investment alone.

Securing capital from friends and family can also act as an effective stepping stone toward future investment deals, as it demonstrates to potential future backers that you’ve validated your business plan among those closest to you.

However, mixing business with family is notoriously risky, and for good reason. To that end, it is of the utmost importance that all investments are thoroughly documented. You should require that they sign a document acknowledging the risk and clarifying that they may not get their money back.

Before accepting any money, do some soul-searching to be sure that your ties are strong enough to withstand any worst-case-scenarios. Have each party sign a promissory note spelling out the repayment terms or, if you’re partnering with a friend or family member, sign a partnership agreement.

Angel Investors ($10k - $250k each)

An angel is a high net worth individual who invests directly into promising entrepreneurial businesses. This capital usually allows the startup to accomplish some of the early milestones like building out an MVP, generating revenue, etc.

Quick facts about Angel Investments:

• There are over 300,000 active angel investors in the United States alone
• Median funding round size for angel investments: $950,000
• Median investment amount per angel group: $127,000
• Median pre-money valuation: $3.65MM.

While certainly savvy businesspeople, angel investors are also less likely than venture capitalists to get caught up in bottom lines and profit margins, and might not be as apprehensive about the numerous unknowns that often come attached to seed-stage investments.

Angels can be an ideal fit for startups because their personal interest in the healthy growth of the business and their own litany of past successes and failures often prompt them to act as mentor and coach to their portfolio companies. Many angel investors also belong to networks of other angel investors. These networks, or “Angel Groups,” pool their money and invest as a group in the deals they like the best. These networks are also beneficial to startups because it can make it much easier to raise larger amounts of capital.

Venture Capital Firms ($2 million - $50 million)

Of the four investor types, Venture Capital firms write the biggest checks with an average investment size of $2.6MM to seed stage companies.
VCs are in the business of reviewing, assessing, and investing in new and emerging businesses. As a result, they look at a very high volume of deals, and on average only invest in 1 out of every 100 deals they consider — compared to angels, who invest in 1 out of every 10 deals. Furthermore, VCs conduct significantly more due diligence than angel investors, spending an average of 5 months vetting each investment opportunity.
Venture capital is consistently an active, rather than passive, form of financing. These investors seek to add value, in addition to capital, to the companies in which they invest, both to help your company grow and to achieve a greater ROI. This means virtually all VCs will want a seat on the Board of Directors.
Although most VC firms will have a website, or other means of sending in cold call solicitations, it is always best to have a referral to a VC by a mutual acquaintance.

This is one of the many benefits of equity crowdfunding: by asking your existing supporters to share your fundraise with their own networks, you open yourself up to the possibility of making connections that you may have previously thought were impossible.

Private Equity ($5 million - $100m+)

Private Equity (and investment banks) are designed for relatively mature companies that are beyond the “will this work?” phase and are onto the “how big can this possibly be?” phase. They operate massive funds that are more focused on smaller multiples than angel investors or venture capitalists, but more guaranteed returns because there is less risk involved in funding an already successful company.

Now that you know which type of investor you’re looking for, it’s important to determine if your startup is the type of investment the investor is looking for. What you’ll find is that investors have specific preferences that tend to skew their focus. It’s important that you understand these preferences ahead of time so that you don’t waste time with investors who simply don’t do your types of deals.

The search for investors takes time. However, we can at least make sure the time you do invest is well spent. These days “investor research” really means combing through a handful of databases and Web sites to find potential connections into the investment community.

Finding investors isn’t like finding a plumber. There’s no “directory of interested investors” that you carpet bomb with emails and wait for people to line up to hand you money. The process is more akin to finding customers, whereby you’re looking for likely candidates and then working to get warm introductions to those candidates to start a conversation.

Your search for investors is going to cover 8 sources:

1. Your Social Network. We’ll describe how to mine not just your contacts, but the friends of friends of friends of friends to find diamonds in the rough.
2. Incubators. Incubators are specifically designed to help entrepreneurs at the earliest stages of their venture by providing a small bit of capital and expertise. We’ll show you where they are.
3. Research Databases. There are some massive databases (mostly free) where nearly every investor can be found and researched (it’s not stalking, really)
4. Angel Investor Groups. There are well-formed groups of angels that you can easily find and pitch through a regimented process.
5. Angel Investors. There are nearly 200,000 angel investors in the United States alone. We’ll point you to the first 20,000 who are the most well known.
6. Venture Capitalists. We’ll show you where to find the 900 registered venture capital firms and how to determine whether they are the right fit for your fundraising stage.
7. Funding Portals + Crowdfunding. We’ll debunk the pros and cons of using a funding portal so that you can make best use of your time and resources.

In the next Phase we’ll talk about crafting your pitch and ultimately reaching out to investors, but for right now let’s just figure out how to compile a list of your best investor prospects.

Before you respond: “I don’t know any investors, why would I bother with my social network?” hear us out on this one.

You probably don’t know any investors - but that’s not the point. You may know someone who knows an investor, and that is how most startups find their first investors. It may not be your uncle, but it may be one of his classmates from college, or someone he worked with at a past job. Searching your personal network is by far the most important research you will do, and you’re about to do it a lot.

Typically LinkedIn is your go-to for this. It’s especially valuable in surfacing 2^nd and 3^rd tier connections to people you know. If you haven’t updated your LinkedIn profile in a long time, now is the time to do it. Also, you can import your contacts from Gmail or other services into LinkedIn which the site will use to scour additional connections you may have.

There’s a twofold approach here:

1. Direct connections.
   Run keyword searches for words like “investor”, “angel”, “capital”, as well as industry words that relate to your startup. Even if some of these connections don’t specifically invest, they may have worked somewhere that is relevant to your industry. Make note of everyone that has any type of connection to your startup. There’s a high chance you’ll need their help later. Obviously if you’ve got a few people with explicit investor credentials, add them to your prospect list.
2. Indirect connections (intros).
   The people who already have a relationship with the strangers you’re about to contact are invaluable here. You’re going to want to expend all of those favors and social capital you’ve built up to politely ask (beg) for introductions to potential investors you don’t know. This part of the exercise will occur a bit later as you find potential investor prospects and then look them up on LinkedIn to see who you may know that can make an introduction to them.

Obviously you can extend your social network search to Facebook or other sites but LinkedIn has proven to be the best overall source of professional background information on people. If you’re LinkedIn network is pretty thin, now is a good time to start adding connections to build up your network. Every new person that you add on LinkedIn is a whole hub of potential connections down the road.

Incubators are organizations designed to help fledgling startups turn their ideas into products. They typically provide a very small amount of capital ($20,000 is common) and take a small percentage of equity. More importantly, they provide a team of experts and mentors that help accelerate the startup of the company by connecting you with people and resources to get stuff done fast. For first time entrepreneurs it can be a great initial partner.

Incubators originated mostly in the tech space but have since grown to 2,000+ all over the world and in a wide variety of industries. Similar to applying for college, each incubator will have a finite number of open spots on a recurring basis and startups will apply to be selected. Like any other investor they have their own geographic, industry and focus areas that they play in.

Take a look at the most comprehensive list of incubators.

You’ll want to start with incubators that are close to you geographically because those tend to be the most obvious fits. Beyond that, incubators that have a focus or history of working with startups in your industry are important. If you’re opening a new restaurant in Wichita it’s not going to do you any good to apply for a tech incubator in Silicon Valley.

Don’t just think of incubators as a $20,000 check. Think about them as the ability to add a large baked in network of connections instantly. Those include investors who use the incubators as a feeding ground for new investments. An incubator can often be a stair step to finding a much larger pool of interested investors.

There are investor databases that have a treasure trove of investor information including what past investments have been made, who the individuals are who made the investments, and how much was invested. That’s the good news.

The bad news is there isn’t a magic database of hungry investors that startups can carpet bomb with emails about their idea. If that list existed every investor on the planet would ask to be removed from it.

For 90% of what you’re going to do you can probably get away with using Crunchbase which is free. While there are other more premium services (listed below) you’d most likely need a very specific use case to bother with them.

• Crunchbase (free). The most comprehensive source of investor information (that’s mostly free) is Crunchbase. Here you can find nearly 100,000 profiles of investors and their investment history. Depending on your needs you can search for angel investors, venture capitalists, and any other type of specialty investor. Crunchbase provides a wealth of background information, from what investments they have done to all their available social network contact information. This is definitely going to be your most valuable asset for broad research. If you want to get additional data you can unlock the premium version for about $350 per year which isn’t a bad investment.
• Premium Services. Most other sources of investor information are geared toward enterprise users so they tend to gate their valuable data behind a paywall. These include services like Mattermark, CB Insights, and the premium version of Crunchbase. The likelihood that you’ll need more than what Crunchbase has to offer for free will be pretty low, so you can probably get most of what you need without spending a penny.

As we explore different types of investors and research strategies you’ll come back to these research databases on a regular basis to cross reference what you find with additional information that you can use. We’ll talk more about how to leverage the details of these searches in Phase 4: Investor Outreach.

Angel Investor Groups are comprised of a number of wealthy angels that band together to collectively review and make investments. They have more formalized processes for finding them, pitching them, and closing a deal than any one of the individual angels might.

Here’s every angel investor group in the United States and Canada.

What’s nice about the angel investor groups is that they are relatively easy to find. Each will have its own Web site that details their investing preferences, existing portfolio of investments and the application process for being considered.

• Benefits of Angel Groups. You can potentially access and entire pool of capital by just pitching one source. There will be a committee that reviews your pitch and lets you know whether it’s a fit for the group. If it is you often have access to the individual members of the group who can provide not only additional capital but their own rolodex of valuable connections.
• Challenges of Angel Groups. They don’t make a lot of investments, and the investments they do make go through a single screening committee. If that single committee doesn’t like what you’re offering it can potentially box you out from accessing the entire group. That doesn’t mean that other angels can’t participate individually from the group, but if they’ve heard that you’ve been denied by a selection committee, it doesn’t exactly help your chances!

Angel investor groups tend to be very localized. If you’re in New York you’ll have better luck pitching groups that are local to your area than trying to apply to a group in California. Unlike larger institutional investors (like venture capital firms) who have the budget and full time partners to travel to follow deals, the angel groups don’t’ have those resources, which often requires them to stay close to home.

Your best bet is to first approach those that are local to your area, first by city, then state, then region. If you’ve pitched all the groups in your region and have gotten a friendly “no”, you’ve probably exhausted your options on angel groups (which happens).

There are two types of angel investors when it comes to researching them – those that identify themselves as “professional angel investors” who you can find online and those that just make investments and don’t share that information. Think of it like the iceberg where you can see 10% of the iceberg above the water (those with public profiles) but the real girth is below the surface.

Here’s a list of over 20,000 angel investors.

According to the Angel Capital Association there are over 200,000 angel investors in the U.S. alone. There’s no good source that lists the other 190,000 so these tend to be surfaced through social connections and personal introductions, but the list of 20,000 should be enough ammunition to get started.

Your search for angels should focus on 3 key filters (in roughly this order):

1. Industry and Location. The ideal angel has invested in your industry and lives next door to you. Angels who can find startups they understand that are within close range are the most common deals. Angels get more anxious when being asked to invest in a space they aren’t familiar with or with a startup that is far away. Both are factors of trust and engagement which you want to use to your advantage when doing your first pass filter of angels.
2. Past Investments. Angels typically don’t do a lot of deals, and those that they do fund tend to be similar to what they have invested in previously. This could include the company that they founded and sold (which is where they created the capital to become an angel investor!) You want to find companies that they may have funded that are similar in nature, but not directly competitive. If you were creating Instagram you’d want to find an investor who has invested in mobile apps, but not necessarily a mobile photo sharing app.
   
3. Common Connection. This is where using LinkedIn is going to be invaluable. If you find an angel that meets the other criteria (industry, location, past investments) a common connection is your next factor to rank against. Getting a warm introduction through a common connection can have a massive impact on your ability to start a conversation, so make finding that connection a critical task.

Venture Capital is synonymous with startups but that doesn’t mean it’s a big category of investors. As you read earlier when we discussed the stages of investment, VCs typically invest larger sums of money ($1 million or more – usually closer to $5 million) and their investment tends to come after angel investors and others have already invested.

There are less than 900 venture capital firms in the United States alone and only a fraction of those are actively writing checks. VCs only write an estimated 1,000 checks per year to new companies (another 3,000 go to existing companies they’ve previously funded). This means pitching VCs is a long shot, and you have to be very careful when you decide to fire that bullet. For example, you wouldn’t want to take an idea you had 2 days ago and start burning up the inboxes of a bunch of venture capital firms.

Here’s a list of nearly every venture capital firm globally.

VCs follow the same typical guidelines that other investors do around industry preferences and the types of deals that they do. However, venture capital is even more hyper specific because they can only invest in industries that have exponential upside (billions of dollars of potential revenue).

1. Stage. Venture Capital firms have a range of “stages” that they invest at – “seed”, “early” and “later” stages are most commonly referred. This typically aligns with the amount of capital the firm has under management (a small firm may have $50 million, a large firm may have a $1 billion). Most firms will specify what stage they invest at on their web site, and if not, you can search the individual firm on Crunchbase to find what size their funds are. If none of that yields an answer, do some research on the portfolio companies investments they have made to get a sense for how big the funding rounds were.
   Your main concern here is avoiding firms that are investing larger checks in later stages. If a late stage venture capital firm is looking to write checks $10 million or bigger, it means they are targeting companies that are very mature or have significant market traction. You’d be wasting your time trying to pitch beyond funding stage of a venture firm.
2. Industry. The partners within a venture firm will have very specific industry verticals that they like to invest in. The industry preferences often align with the individual partners as much as the firm itself. So if you find a firm that invests in retail, look for the specific partner who has that focus. If you’re unsure, try to find out what board seats they are on and that usually maps to the industry they are most comfortable with. VCs write very few checks, so it makes sense that when they do write a check it’s within an industry they understand very well.
3. Location. Location is a bit less important for VCs than it may be for angels but make no mistake – VCs don’t love to travel. If they invest in your business, they expect to meet with you for board meetings and other engagements. If you’re a VC living in Silicon Valley and you have the choice between making an investment in your back yard or flying for 5 hours for 2 days round trip to spend time with another startup, which one are you going to be more excited about? VCs have families, too. Unless you live in San Francisco you’re not going to find a lot of VCs in your area – maybe a couple at best. So be mindful that once you leave your city or state, the challenge of raising venture out of your neighborhood increases as well.

While most VCs have some form of contact information on their Web site, it should be your absolute last resort to make contact. We’ll discuss this later in Phase 4 however as you’re compiling your list know that your introductions to VCs are almost always going to have to come through a reliable 3^rd party as these folks are far more selective than anyone else.

We’re well versed in funding portals because, well, we run one at Fundable.com! Having helped startups secure nearly a half billion dollars in funding commitments we can tell you that while funding portals can be a huge help in surfacing investors that you’d never be able to find on your own, they probably don’t work exactly like you think they do. When selecting a funding platform it’s important to know what you’re looking for.

When setting out on the path to identify investors, the most common questions that the majority of Founders have are, “what kinds of investors are best for my raise?” and “where do I go to find them?”

We’ve spent this phase of the Funding playbook shedding light on these key challenges to show you how to break this process up into super digestible steps and begin knocking out your own investor selection starting today.

Now that we understand the different types of investors and that startups tend to raise capital based on their growth stage, you should have a good idea of who you should (and shouldn’t) spend time looking into.

This approach tells us that if you’re still in the concept (seed) stage, starting with friends & family is your best bet. If you’ve already built out your MVP and started generating revenue, angel investors are probably more appropriate for your growth stage.

We found that your personal network is far and away the most important starting point for researching investors. Take advantage of LinkedIn and see if you can uncover any connections one of your contacts (or one of their contacts) might have to an investor.

We’ll eventually circle back to many of these topics when we get around to discussing investor outreach later on in Phase 4. But before we get there, it’s time to learn how to craft the perfect pitch so that when you do launch your outreach efforts, you’ll be primed and ready for success.