How to Choose the Right Investor for Your Startup?
If you have decided to take your startup to the next level, you will need to raise funds for its development. Investors can provide you with a sufficient sum of money if they believe in your idea. But where to find these investors and which of them are right for you?
This post will analyze the types of investors and suggest which investors to choose at a certain stage of business development. We’ll also list criteria to help you find a perfect match among investors and advice on how you can attract investors with the help of MVP.
Types of investors who fund tech startups
When you're launching a tech company, the most important thing you need is money. You need to invest in your product, team, and marketing. Investors can help you with that.
There are several types of investors. Get acquainted with each of them to choose the right investor for your startup.
Venture capitalists. These are professional investors who invest in high-growth companies. They are ready to give large sums of money and expect to become members of the company's board.
Angel investors. These are wealthy individuals who invest their own money in startups. Investing is a sort of side activity for angel investors. They do it occasionally if they like the idea of a startup.
Corporate investors. These are big companies that want to get a new product or technology and use it to stay ahead of competition.
Family and friends. Well, these are family and friends. They are usually the first people you turn to for funding. Although they may not have deep pockets, they would be more forgiving than other investors if things don't go according to plan.
Certain investors at a certain stage
When you're ready to take your startup to the next level, it's time to start thinking about investors. But how do you know which investor is right for you?
You should decide how to get investors for your startup depending on the available resources and plans for business growth. However, there is a generally accepted scheme for attracting investments depending on the stage of business development.
Early stage: pre-seed, seed
The amount of funding - up to $100,000
At the pre-seed stage, the founders determine the problem of a specific audience and come up with a solution to it. It doesn’t get to the prototype or MVP yet, but the conceptual basis of the product and an idea of how to conquer the market already exist. The costs incurred at the pre-seed stage are mostly covered by the founders' personal funds.
At the seed stage, the founders already have MVP, customer feedback, and the confidence to move on. This is the time of the product's active promotion and the audience's rapid growth. Founders' funds are no longer enough, so they attract private investors, business angels, and seed investment funds.
Growth and expansion: Series A
The amount of funding - from $500,000
At the Series A stage, a startup is actively growing, increasing its customer base, implementing new features, and looking for new investments. At this stage, big venture capital market players come into play. They are investment funds ready to give big money in exchange for a share in the promising enterprise.
Startup maturity: Series B,C,D
The amount of funding - from $1,000,000
Late investment rounds serve mature tech startups with an established market value and proven development strategy. Traditionally, each investment round has its own task:
B - scaling
C - return on investment
D - attracting a strategic investor
Note, that a startup can raise funds by following investment rounds one by one or by combining or skipping some of them. Also, several companies can act as investors fora startup simultaneously.
Series B,C, D investors are often the same startup business investors who led the Series A round, i.e., big venture capitalists and investment funds.
Exit stage: IPO, takeover, sale
The amount of funding - from $7,000,000
There are three startup exit strategies:
takeover (acquisition) or merger
public offering of the company's shares (IPO),
full or partial sale of the company
At this stage, the startup investors are the new owners, who partially or completely undertake the company management.
How to ensure investors are a 100% match to your project: 10 criteria
When you want to find an investor for a startup, you may be tempted to accept the first offer that comes along. However, no matter how badly you need the money, it's necessary to take your time and evaluate a potential investor from the perspective of a future partnership. After all, this is someone who will play an important role in your business, so you want to make sure that you're compatible.
As a beginner entrepreneur, you may find it challenging to correctly evaluate investors for your startups. So, here are 10 criteria to help get you started.
Product vision. Are you on the same page with your investor about the overarching long-term mission of your product?
Industry experience. Are your investors aware of the work details in a given field?
Company reputation. Do the investors have a proven track record of success?
Financial situation. Are they financially stable?
Business maturity. Are they available to provide mentorship?
Human resources. Are the investors willing to put in the time and effort to help your company grow?
Investment philosophy. Whatbeliefs and principles do your investors follow?
Legal compliance. Do they have a transparent scheme for receiving and investing money?
Partner reliability. How well do you know them? Will they be a long-term partner?
Communication style. Are they easy to work with?
MVP as a way to attract investors
There are thousands of startups worldwide, and each of them is wondering how to find investors for business development. The easiest way to do this is to prove the validity of your idea. You should show investors that your product is needed by users and that it has a big chance to be successful in the market.
One way to do this is by developing an MVP (Minimum Viable Product). An MVP is software with essential features, which allows you to test the market and get feedback from users. This is an important step because it helps you focus on the customer and ensure that you build something that people want to use.
A successful MVP makes it easier to get investors on board because they know that there is a good chance of making a return on their investment. And if you want your MVP to coincide with a defined product vision, make sure it is developed by a team with proven domain expertise.
Conclusion
Choosing the right investor is a critical decision. Inexperienced entrepreneurs might think that startups don't have to choose and that they should partner with the first individual or company ready to invest in their business, but this is not so.
Finding the right investor is important because you don't want third parties to lock you into their terms and conditions or take over your company.
You should choose the investor based on your business plans and goals, product vision, and the stage of startup development.
No matter what stage you are currently on, potential investors will want to make sure you have a professional development team in place. If you're looking for one, get in touch. We will be happy to help.
FAQ
This is a question you should ask yourself early in the startup process. Do you have the money to sustain yourself and your company for at least 12-18 months? If the answer is no, then you'll likely need to find an investor.
There are a few key factors to keep in mind when choosing an investor. First, make sure the investor has a good understanding of your industry. Second, check to see they have a solid track record of success with startups. And finally, ensure they're aligned with your company's values and vision.
The process for finding and vetting potential investors can be time-consuming, but it's worth taking your time to find the right person or company to invest in your company. Start by researching potential investors and narrowing down your list to a few that are a good fit. Then reach out to them and ask if they're interested in meeting with you. Once you've met with them, it's important to do your due diligence and make sure they're a good fit for your company.
