3 Ways to Find Smart Money for Your Tech Startup
The far more effective approach is for founders to contact their ideal investors from a position of power
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As the tech ecosystem in the Asia Pacific is still nascent, most entrepreneurs who fundraise for their startup are doing so for the first time. Unfortunately, for as much as local headlines celebrate the latest fundraising news, there are comparatively much fewer resources that give guidance on successfully navigating the world of venture capital in the region.
The most common misconception that local founders have is that all venture capital is created equal. Some founders are so eager to fundraise that they will take money from whoever is willing to open up their pockets. This mistake leads to a tremendous opportunity cost: Every investor a startup takes on who brings only capital displaces another who could have brought much greater strategic value.
Entrepreneurs in the Asia-Pacific region should follow these three principles to help them find, collaborate, and succeed with investors who are the ideal kind: smart money.
Understand Which VC is Right for Your Firm and How You Can Increase Your Chances of Landing Them
There are three key stages when founders should fundraise. When they are still searching for product-market fit, entrepreneurs can take capital from the three Fs—friends, family, and fools—as they are still trying to get their product in the hands of customers.
In the latter stages of a startup, when founders are either scaling up or expanding, they need to be much more conscious of an investor's specialization. Some will actively brand their core competency, while many others will not, so founders need to do their homework. Does the investor primarily operate in software or hardware? And within those broad categories, which sectors do they focus on? In software, there is everything from mobile banking and content platforms to on-demand apps, while the hardware has everything from smartphones and electronic peripherals to Internet-of-Things devices.
If you're a Software-as-a-Service company, for example, you wouldn't want to reach out to investors who specialize in fintech. You will instead want to raise money from a SaaS-focused investor, who has the experience, skills, and domain expertise to help you scale. They can even create synergies between your SaaS company and another one in the portfolio, such as by bundling your service with theirs to reduce customer acquisition costs.
Get at Least Two Out of These Three Crucial Factors in Your VC
Just as investors will evaluate you by a particular framework, you should too weigh their relative merits with certain criteria. In this case, there are three: money, the strategic fit, and reputation.
The most obvious factor is money. What are their usual deal sizes, or if they've already extended a deal, how much are they offering? The second is the strategic fit, as discussed above. The third data point is the hardest to gauge, as it is the most amorphous: reputation.
How does the tech community perceive this venture capital firm? You should carefully consider their reputation, not for your own ego, but because it will translate into dollars. The more respected a venture capital firm is the easier it will be for them to open doors for you with other investors when you look again to raise in follow-up rounds.
Be aware that there is no such thing as a dream investor who will check off all the boxes. There will always be trade-offs that you must consider. A family office, for example, could invest significant capital, but bring little in the way of connections to other investors or other competitive advantages. From this vantage, fundraising is as much an exercise of self-awareness for founders: What matters to you?
Approach Your Target VC From a Position of Power.
You should make a wish-list of at least 20 local and regional investors who best meet your criteria, arranged in descending order of your preference. Though you may be excited to first reach out to those at the very top, you should instead work your way upward from the bottom.
This bottom-up approach may seem counterintuitive, but it makes practical sense. By the time you reach your top choice investors, your pitch will have been battle-tested and honed to perfection from sheer practice. You may also have offers in hand from other investors that you can use as leverage in also attracting one from them and negotiating the most founder-friendly terms.
When it comes to the actual communication channels you use to contact investors, you should avoid emailing them at the address listed on their website, or messaging them on their social media channels. In other words, cold contacting is a less than optimal approach, but if you have no other options, it's best to go direct: Rather than reach out across official company channels, contact individual employees, associates, partners, or principals.
The far more effective approach is for founders to contact their ideal investors from a position of power. Look up your mutual friends or connections on Facebook or LinkedIn, and ask your most trusted contact in this list to make a positive introduction. This small step takes more time, but it changes the dynamic: Rather than appear like every other founder who is seeking their capital, you become someone who is offering them an opportunity.