Finding investors is hard work. Entrepreneurs who have been through the process a few times, like Todd Parsons, 40, co-founder of San Francisco-based BuzzLogic, will tell you it's the hardest part of running a business. For Parsons, who co-founded BuzzLogic with Jeff Glover, 40, and Mitch Ratcliffe, 45, finding venture capital to turn the consulting company into a cutting-edge software company took about four months and included some of the most grueling analysis, networking and salesmanship of his career.
Parsons found one tool that made the search easier and ultimately more fruitful: an online database that helped him find and evaluate investors in his area and industry. The investor database he used from Growthink Researchis one of hundreds of such tools that have sprung up both online and offline.
Ranging in price from a few hundred dollars to several thousand, an investor database can streamline your money-raising efforts; even the simplest investor list may be enough to help you find the perfect fit. However, no list is perfect, and even the best database cannot guarantee that you'll raise any money at all. How you select and use a database will likely determine your success.
Quality vs. Quantity
Most investor databases boast about the number of VCs or angels they track. Many claim several thousands of investors across the country. But having a long list isn't the only thing that matters.
"The real question is, How much can you really know about the VC in the database?," says Michael Makropoulos, CEO of Ntrinsic, a marketing firm that has used VC databases to help clients raise capital. The key, he says, is to pick a database that will help you qualify investors as thoroughly as you would prospective customers. "You've got to find the right target market for your investment opportunity," he says.
The best databases come with search functions that make selecting the right investors easy. Look for search functions that can help you match your investment needs to the investors' stated preferences and strengths. "Think of your investment needs in terms of industry, category, geography, stage of development and dollar amount," says Makropoulos.
A quick query on those general terms should help you narrow down prospects to 10 or 20 potential matches. If the database search leaves any room for doubt, go directly to the investor's website and see what they say about themselves, says Makropoulos.
The more you learn about potential investors, the easier it will be to eliminate some and focus on others. Some databases, for example, can help you determine if the VC fund has cash ready to invest or is in more of a maintenance mode. Careful research using the database and the web may help you differentiate between funds that invest broadly in your industry and those that invest specifically in your niche. Knowing the difference can be crucial.
Once you've narrowed the search to a few candidates, it's time to consider the investors' personalities. "I've always looked at choosing an investor like choosing a partner in marriage," says Parsons. Get to know the principals of the firm, he advises. "Are they finance guys? Operators? Innovators?" Look for a database that includes backgrounds or biographies of the investors. Find out what roles they have played at previous employers and within their current companies.
"It's not about taking the money," adds Parsons. "It's about what those folks are going to do to help you grow. That takes research." Both Parsons and Makropoulos say they have used databases to reveal relationships between prospective investors and other companies in their industries. Be sure the VC's prior investments are similar to your opportunity--but not directly competitive with your company.
Finding these portfolio relationships accomplishes two things, says Makropoulos. "You might discover portfolio companies that could become exciting strategic partners for you, and you'll find the names of other entrepreneurs who have dealt with the investors before." Talking one-on-one with the founder or CEO of a portfolio company will reveal important details about the investment firm, the individuals at the firm, how they evaluate investments and the way they're likely to interact with you after the investment is complete. It takes that kind of insight to know whether the chemistry will be right and how one investment group may be better than another for a particular situation.
A Common Thread
Of course, no database can ensure that the investors you find will be equally interested in you. As Makropoulos puts it, "It's always more valuable to get a referral to a VC." But careful use of a database can facilitate introductions, too. Identifying all the interrelated portfolio companies and VC firms helped Parsons find a warm lead to most investors he wanted to meet. "If it's not a personal relationship or friend, it's someone I've met at a portfolio company that can get me in front of these folks," he says.
In fact, some database products are built solely for the purpose of facilitating these kinds of introductions and relationships. Social networking sites like LinkedIn and Spoke can show you who you already know that might be able to warm the door at an investor's office.
"The key to raising venture capital is not to show up as a random blip on the VC's radar," says Keith Rabois, vice president of business development at LinkedIn. "What's unique about LinkedIn is that we can tell you who you know in common with a particular firm or VC. Then you can use them as a reliable introduction [to] get your business the attention it merits." LinkedIn claims more than 60,000 investors as members, so you might be surprised at how easily you can find a common acquaintance.
The End Game
Finding the right investor and persuading them to put up equity capital is a combination of timing and preparedness, says Parsons. "It's that perfect storm--if you have all the data you need to make a quick assessment, then when your business has built up appeal for investors, you're ready to go."
In Parsons' case, being ready to go earned him a $9.6 million investment. Better yet, the investor he selected has made a great match for his company, he says, and he credits the database he used with helping to make the match obvious. "You'll know the right fit," he says. "More research never hurt anyone."
David Worrell is author of the e-book Finding Funding.