Time is too precious to waste trying to close a deal with the wrong investors at the wrong time. Luckily, not all investors are looking for the same thing, so it pays to know what type of investors are most interested in what your startup brings to the table.
The key is understanding how potential investors see you, and especially how they view the maturity stage of your startup. For example, if you have a proven product, real revenue, a big potential market, and are ready to scale up the business, every investor will be interested. On the other hand, if you are a new entrepreneur, still in the idea stage, professional investors will only tell you to come back later when you have traction (customers and revenue).
Thus your startup maturity and growth stage is the primary key to success with potential funding sources. Different types of investors tend to specialize in capitalizing on businesses at different stages. Venture capital firms look for the most mature companies they can find, Angel investors typically deal a tier lower, while friends and family are most likely to help you get started.
It never hurts to start networking personally with all levels of investors, but sending out teasers and business plans to every name you can find on the Internet is a waste of your time and theirs. It will be much more productive to categorize your startup in one of the following five stages, and limit your investor focus accordingly:
1. "I have a great idea and I need money to turn it into a business." For investors, this is the idea stage, where you may have a great idea, but no plan, product or customers, and probably no success record in this business domain. No professional investor will be interested at this point, so count only on yourself, friends, family and fools for money.
2. "My invention and prototype works, but I need funding to continue." Investors call this the seed stage, where money is required to build a market and a real product. Government grants and industry partners are your best bet here, but Angel investors might give you $250,000 to $1 million, if you have the right business case and credentials.
3. "The final product works great, and all the early users love it." You are now entering the rollout stage, with money required for marketing, hiring a full-time team and a production process. At this point, most Angel investors and a few early-stage VCs will be happy to talk, assuming you have the business model validated and a large opportunity.
4. "It’s time to scale up and I need money to keep up with demand." Congratulations! Every investor wants to be part of your growth stage, after your first $1 million in revenue. They call first investments at this stage the “A-round,” and often follow with a B-round through G-round. Growth-stage investments from VCs are usually $5 million and up.
5. "The ride has been fun, but I need money to start the next big thing." This is the exit stage for the entrepreneur, and for all earlier investors. The new investors you need at this stage are investment bankers, private equity or competitors, to buy you out via merger or acquisition (M&A), or to go public with an initial public offering (IPO).
Obviously, maturity and growth are a continuum, so the rules are never absolute. Your startup will attract a different class of investors as it passes through each stage, just as it has to supplement and tune the team, process and product to keep up with the needs of a growing company and customer base. Tune your investor pitch and funding expectations accordingly.
Another good indicator of your real stage is the valuation you can set for your company at any given moment, to determine what portion of your equity an investor will expect of their money. Prior to the growth stage, your company valuation is limited to goodwill based on intellectual property and team experience, since you have no revenue. Future opportunity size doesn’t count in the early stages.
Contrary to popular opinion, all investor money is not the same. Friends and family believe in you, and only want to see you achieve success. Angel investors probably will know your business, and want to be mentors along the way. VCs normally come with the highest expectations of board seats, controlling votes and milestones to meet.
Don’t sign up for one expecting the other. If you want to avoid all these stage and investment considerations, you can always bootstrap the business (fund it yourself and grow organically). Otherwise, be sensitive to potential first impressions you leave on every investor, and the efficiency of your time spent on funding. You will enjoy the lifestyle a lot more when you find the right investor.