how-to-pick-the-right-vc-or-investor

January 18, 2022

How to Pick the Right VC or Investor

Ray Gibson Written by Ray Gibson

Choosing to raise funding is a huge decision for any startup.

Opening up the business for investment is both exciting and scary. On the one hand, more money means more opportunities. With additional funding, startups can hire new teammates, build new products, and develop new sales channels. For many startups, outside funding is the launching pad that eventually leads to long-term profitability and success. 

At the same time, investor capital can handcuff startups in certain ways. Founders lose the flexibility to decide how to run the company, and venture capitalists (VCs) can become boss-like figures, i.e., the people who many entrepreneurs try to leave behind. Additional funding can also add pressure to a situation that is already chaotic, stressful, and energizing all at once. VC-backed startups are often charged with generating massive returns, which can crush a business that was only meant for a modest existence.

So, it’s important to go into the fundraising journey with a full understanding of the pros and cons of doing so. Otherwise, you risk making a mistake in either direction that could hurt, or even kill your startup. For those committed to raising money from third-party investors, there are several things to keep in mind to avoid getting into a bad situation. By taking the following suggestions to heart, you can find the ideal VC or investor group for your organization.

Funding Ability

Here’s a surprising reality: not all investors are in a strong enough financial position to make startup investments. Some have capital tied up in other businesses. Others have challenges in their personal lives that could zap their funding capacity overnight (e.g., divorce settlements).

Before you chase down a specific investor or spend a lot of time introducing your startup to someone, make sure they have the means to make a meaningful investment. If you need $200k, don’t waste hours preparing pitches for people who can only give you $5k. 

Match Quality

VCs and investors tend to specialize in different segments along the startup growth journey. A lot of VCs just want to jump into already-profitable businesses and accelerate growth. On the other side of the spectrum, some VCs love the excitement of getting in early and helping founding teams go from zero to one. 

In the search for a funding partner, it’s critical to target those whose interests align with the developmental stage of your company. Don’t choose someone who only wants to put the pedal to the metal if what you need is a true thought partner, firefighter, or door opener. Obviously, the hope would be that both sides recognize a bad fit when it’s there, but keeping this in mind can save you time upfront. 

Influence and Network

Investors can bring a lot more to the table than money. The right investor can make crucial introductions, provide valuable wisdom, and serve as a megaphone for your brand. Don’t just partner with a VC who has deep pocketbooks. Consider everything she brings to the table and how it could benefit your startup. 

Depending on their networking ability, one investor could lead you to several others who quickly complete your funding round. However, you may want to be careful when it comes to bringing a group of friends/investors together. Oftentimes, it’s better to diversify to expand the range of opinions and opportunities in front of your business. 

Cultural Fit

It’s easy to overlook the importance of finding a VC firm or investors who are culturally aligned with your startup. After all, what you’re looking for is money. But the truth is that a good investor will want to be involved in your business. If she plans on putting skin in the game, she’ll want a say in what happens. 

If the investor is a poor cultural fit, all future conversations will be taxing. It’ll become a chore to work with that person, which is not how you want to feel when you’re building a business. Plus, breaking up financial relationships in the startup world is a nightmare. One way to think about this is to ask yourself whether you would hire your investor to work in your business. If the answer is “no,” you probably shouldn’t accept their money.  

Go Forth and Fundraise

Beyond these points, there are other ways to evaluate potential investors. But the sections above highlight the key factors any founding team should consider before starting the funding search process. It’s a long and arduous road, so don’t go down it without understanding the potential pitfalls ahead. 

Ray Gibson
Ray Gibson

Ray Gibson is founder and CEO of Funded.club. He brings 20 years of experience in recruiting across Europe, North America and Asia and 5 years running his own startups.

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