Your bootstrapped startup has developed a great product that has begun to gain traction among customers and has generated buzz in the startup community. Now, you want to tread the path of strong growth and need to enter the world of venture capitalists (VCs).
Raising money from people you don’t know well is one of the biggest challenges faced by a startup. However, the good news is that VCs are already attracted to your startup if it has created a buzz. There is a plethora of investors to choose from – a situation in which not many startups typically find themselves.
Choosing the right investor before entering the next phase of growth is akin to a gladiator selecting the right weapon – make the wrong choice and you could end up being dead. It’s imperative that you make the right choice and not jump at the first offer that comes your way, not only if you want your startup to survive but also ultimately be successful.
Here are seven tips for choosing the right investor:
1. Don’t be blinded by the colour of money
Understand the people behind the money. The money will ultimately get exhausted but the investor will continue to be with you. And you don’t want to be stuck with the wrong person. Therefore, before you commit yourself to a startup-investor relationship, it is imperative that you devote sufficient time towards understanding your investor and the individual from the investor’s side who will join your board.
Assess the compatibility quotient as you both will have to spend a lot of time together through ups and downs. It is vital that your basic values and operating styles are in sync for the startup to function as a well-oiled machine.
2. Ask a lot of questions
It is not just the venture funds who need to know everything about the startups they choose to invest in. Startups, too, need to understand the venture funds well - their investment philosophy and the people who manage the funds.
Ask questions that allow you to closely evaluate the investors’ track record and at the same time make the investor feel that you are looking for a reliable partnership and the right fit, rather than just the money.
Some of the relevant questions you could ask are:
a. Besides the money, how else can you help our company?
b. Could you share some of your success stories?
c. Could you share an instance where your investee company did not meet expectations? What did you do?
d. Do you have operating experience?
e. Do you have any experience in the industry we operate in?
f. Why would you like to invest in our company and how well do you understand our business model?
Also, do not forget to ask your investor for introductions to founders of some of their investee companies, both successful and not-so-successful. What you will learn from these conversations will be well worth the time.
3. Assess the value that the investor brings to the table
As an entrepreneur, you must look for investors who can make relevant industry and customer connects, provide market insights and access, offer strategic advice and mentoring, and add value in other ways that help your startup scale and grow.
4. Gauge the level of commitment
If a fund’s strategy is to make multiple small bets versus making fewer and bigger bets, then they are likely to spend less time on you and vice-versa. Some founders prefer that their investors simply write the cheque and then let them run the show with minimal intervention.
On the contrary, there are those who seek guidance and mentoring and prefer that their investors engage with them actively. During the diligence process, you should have candid conversations with your investors to assess their style and take time to reflect on your own style to ensure that you are not getting married to the wrong person.
5. Understand the investor’s exit timeline
If your investor’s horizon is shorter than the time that you think is needed to scale successfully, then you have a problem. Many companies have failed because their investors’ patience ran out just when things were about to take a turn for the better. Make sure you and the investor are on the same page when it comes to exit timelines. It is always wise to discuss this with your potential investor early in the process.
6. Find out how much they trust you
Try to make sure that your investors trust you and your team, and are not in love just with your idea. If they do not trust you then the investors are more likely to lose conviction at the first signs of any trouble. If they believe in you, then they will be more inclined to give you leeway to experiment and try new things and allow you to pivot if the original idea is not working.
7. Steer clear of investors with a limited track record
Startups often accept money from inexperienced angel investors because the terms on offer are better than VCs and experienced angels. During greed cycles. you will come across several such rich individuals with enough money to spare who aspire to be angel investors.
Their only motivation for becoming an investor is to flaunt their status as an angel, and worse, assume a position of power over the entrepreneurs who come to them for funding. This type of investor is best avoided because at best they have very little to add to you or your business and at worst they can be a real pain in the neck if the business doesn’t perform as anticipated.
At the end of the day, be aware of your potential and don’t take for granted that your investors will help you to pull off miracles. They are only humans and even the best investor can merely help fuel the spark in you to turn your dreams into reality. It is ultimately you and your team who are responsible for ensuring the success of your business.
Dhruv Agarwala is Group CEO of Housing.com, PropTiger.com and Makaan.com. PropTiger's main investor is News Corp, which is the parent of The VCCircle Network. The views expressed are personal.