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When a founder is looking for money, there are different types of financial backers depending on the phase and need, such as Venture Capital, Business Angels and Family, Friends & Fools (FFF) to Crowd-Investors or Accelerator programs which can provide you with a certain amount of liquidity. In this article, we do not focus on the quantity of money, but the quality of money. Regardless of the size of the round, the choice of investors has a big impact on the success of your startup. But what should you pay special attention to when seeking growth money from venture capitalists?
We, EquityPitcher Ventures, are a professional Venture Capital investor. Therefore, we are biased when it comes to the quality which entrepreneurs should look for when approaching investors. Together with some of our successful entrepreneurs, we have developed a guide to help founders know what to look for:
1. Prepare and don’t waste your time
The first essential step is to decide which type of investor is right for your funding round. In order to attract a VC investor, it is important to know in advance what their investment criteria are (such as ticket size, regions, industries, timing of investment, etc.). You can find this type of information on the VC's website, and you can also track their fund activity on CB Insights or Crunchbase. Accurate preparation and pre-selection will prevent wasted time for both investors and founders.
2. What kind of value creation are you looking for?
Great startups can choose their investors and since there’s competition for the best startups a VC must have a clear competitive advantage. Therefore, we advise to think carefully about the following questions:
Why are you looking for capital?
How are you planning to use the funds raised and which milestones shall be achieved during what timeframe?
What are your goals and next steps?
What skills, competencies and other resources do you need to achieve the goals?
How can an investor contribute to your growth on a non-monetary basis?
It may be that you are looking for investors to help you make quality introductions. Or perhaps you are looking for internationalization skills or a known and reputable VC investor to attract future investors. Make sure you have a clear understanding of what value-add you need. It is therefore recommended to have a diversified cap table.
3. In good and bad times
Trust - This is one of the most important factors in choosing the right investor.
A good investor-startup relationship can be based on completely different skills or ways of working, but there must always be good personal chemistry when working together. Founders should try to find investors that fit the startup's brand and culture and be certain that investors will also support you in difficult times. Make sure you get to know your investor or advisor who will be appointed to your board before deciding on a deal.
However, we believe it is critical to understand how a Venture Capital works. Although it is about supporting people and enabling them to achieve their dreams, VC is not charity. As one of our portfolio founders said correctly, "It's important to understand that investors and founders sit on two different sides of the table when negotiating terms. A VC invests money from limited partners and must handle that money responsibly and negotiate good terms. But once you agree on the terms of investment, as a founder you have to trust that you're on the same side of the table from then on, and that both will put in the work and sweat to achieve the common goal."
4. Do Due Diligence
Investors do their due diligence by interviewing clients and team members - why wouldn't you do the same by talking to the founders? We believe that you should talk to the founders of a portfolio company of the Venture Capital for great references. Why is this so important? Learn here about one of the worst examples I have ever heard of. We at EquityPitcher Ventures are extremely proud that most of our investments came through referrals we believe that this is the best start for a trustful relationship.
Overall, we believe that as a founder, you shouldn't just accept the first offer you get, but really prepare yourself for what you're looking for and what your company needs. It's difficult to say how much time a founder should spend on fundraising because operations are neglected. A rule of thumb and our empirical data is that fundraising takes about six months. We find that efficient fundraising can be influenced especially by optimized processes of a VC, which we will publish in another article soon.
EquityPitcher is an early-growth venture capital firm that supports promising startups from the DACH region. By working closely with renowned industry experts, investors and exit partners, we pave the way for entrepreneurs to achieve the three critical success factors: capital, know- how and network. Our added value is our large network - we work hard to support the growth of our startups and are proud of our track record of fruitful introductions that have significantly supported the growth of our portfolio over the past years.