How to Choose the Right Investors For Your Startup
Grow Your Business, Not Your Inbox
In the early days of the startup journey, securing funding is mission-critical. Five years ago, when my team and I started Capella Space out of a Stanford University garage, we felt the pressure to secure that early capital, too. You need investors so you can fund product development, early marketing efforts and your growing team. Because of this, it’s tempting to accept the first or the biggest venture capital deal you can find. But in reality, it often pays to be picky.
It’s well known that venture capitalists do a lot of vetting to make sure they invest in the right companies with the strongest potential. What founders often don’t realize is they should also be doing their own due diligence. You are picking investors as much as they are picking you, and it’s important to choose the right ones if you want to set yourself up for optimal growth.
I’ve learned from experience that there are a few key considerations you should make before choosing your investors. Here are the five questions all entrepreneurs should ask about new investors before taking that meeting.
1. What are your goals?
Every entrepreneur is unique. Until you first understand why you are doing what you are doing, it’ll be impossible to find the right match. Before you begin speaking with investors, you need to have a clear understanding of your own goals. Is making money your main motivation? Are you trying to build a long-term business? Do you want to be at the helm at all costs? In short, why are you building this company?
Not every venture capitalist is going to be a perfect match for your needs. For my business, I've opted to pick VCs with a long-term investment view and the patience required to build space businesses instead of those who are optimizing for their internal rate of return (IRR) and want a quick multiple. But that might not be the right choice for you if you prefer to build your company with the goal of getting acquired within the first 24 months.
Related: How to Attract VC Investors
2. Can you trust them?
No matter your long-term goals, it’s important to find a trustworthy investor that wants the best for you and will prioritize your company’s success over all else. When times get tough, you need your investors to work with you and support you in making the right decisions for the company. In difficult situations, you will need to have crucial and transparent conversations with investors. Getting through the hard times takes trust built during good times.
When I picked my existing anchor investors, I talked to their portfolio company founders and CEOs to learn more about their personalities. I wanted to know how they behaved when times got tough for the company and if they trusted their investors. Ultimately, you are bringing investors into your war room, and the last thing you want is to have someone who is actively putting their interest above the company's.
3. Have they backed other successful companies?
The internet offers a wealth of data on venture-capitalist track records. Websites like CB Insights and Matter Mark rank every single portfolio of every single venture capitalist to help entrepreneurs like you understand if they have growth portfolios or not.
Finding an investor with a winning track record matters because success drives more success. If your investor has a network of successful operators, you will be surrounded by other successful leaders. As your investor learns, they can pass that on to you. I have seen this first hand with my existing investors. As my company was going through Covid-19, I was able to get a sense of what some other leading early stage technology companies were going through, and my lead investors brought that perspective into operations.
A good rule of thumb: It is always better to be on the backup team of the winning portfolio than on the primary team of a losing one. Think about the diligence these investors are putting you through and how thoughtful they are with their questions. If they are not impressing you, that should be a red flag. If they are putting minimal effort into their diligence on you, that should speak volumes to how they conduct this process across the board. That tells you they are not picking winners, and you want to be on the winners’ team.
4. What percentage of their portfolio gets follow-on financing?
If you are raising your series A, don’t get complacent. You should already be thinking about raising your B and C rounds, too. Who invests in your current round will send signals to other future round investors. And importantly, your current investors will also be crucial for helping you find future financing through their network. When an investor on a top list picks you, many other investors will give you the benefit of the doubt. That is hugely important when you have to raise your next round.
You should be looking for an investor who will have the benefit of the doubt with other venture capitalists. If they do, they’ll be able to call other investors on your behalf and make a case for why they should put more money in your company.
5. Do they map with you as a person?
You want investors with a similar view of the world, whether that means they share the same perspective on society and life, or align on the business goals, outcome and strategy of building a good company. I optimized to get people on my cap table that want to change the world for the better in a meaningful way. y
When you partner with investors, you choose people you’ll bring along with you on your journey, so you need to pick people who reflect your values. Doing so not only makes the journey easier, but also ensures that in the end, when you are successful, your investors are successful with you.
Choosing the right investors for your startup is almost as important as getting funding in the first place. When beginning the fundraising process, make sure you look for partners with a good track record who align with your vision, will help you build your network and map with your perspective on life. Doing so will set you up for long-term success and make the startup journey a bit easier along the way.