So you’ve nailed down the big idea, you’ve got the inspiration, and you’ve laid out a savvy business plan – now all you need is the right investor (or investors) to get your startup off the ground. For many new entrepreneurs, this is the hardest part (so far)…it usually requires pitching your idea (and essentially, pitching yourself), to family and friends, and as the business grows, to angel/seed investors and venture capitalists. It requires asking people to place their money and trust in you and your ability to make something out of nothing. For even the most self-assured among us, this is no easy task!
Securing the right investors, at very specific points in the lifecycle of your business, can ultimately make or break your entrepreneurial journey.
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Where is your business at?
It is helpful to understand the different stages that any successful startup will ultimately go through, and then to ‘match’ the right profile of investor to each stage.
During the founding/startup phase, entrepreneurs typically turn to friends and family, and people who instinctively know and trust you, as the individual with the idea. This is primarily because there is no real business entity at this stage – these early investors are being asked to put their money behind a person, and that person’s perceived potential.
Once the startup has reached the seed stage, during which the business is still going through a great deal of change (i.e. still in discovery mode), you need to look for investors outside your close circle of family and friends – but who are still interested in backing a team. These seed investors need to have a great deal of flexibility and patience, as they will be required to tolerate and navigate significant changes as the business finds its feet. At this stage, you need to start looking for investors with a certain track record and level of credibility. In a perfect world, these investors would be high net worth ‘angels’ who are adept at spotting both promising individuals and promising ideas.
Things Are Getting Serious…
Having entered the post seed phase or ‘growth before break even’ stage, you should now be targeting the traditional venture capitalists who can leverage both their experience and networks to bring more structure to the business. At this stage, the startup is settling onto a path which although promising, requires both capital and high level expertise to propel it to the next level. The ideal investors for this phase are early stage venture capitalists who can help ‘institutionalise’ the business and introduce governance structures and formal metrics.
Finally, having (hopefully) reached the ‘post break even’ stage, you should be in discussions with high level venture capital investors who have a solid track record of having propelled them onto the global stage and exited their investees with eye-watering valuations.
Trust and Transparency
At every stage in your startup’s lifecycle, and with every investor you approach, there has to be a strong foundation of alignment, trust and transparency. Each and every investor you bring on board will undoubtedly have long-term implications for the business. Moreover, it is critical to ensure that your values are aligned with those of your investors. For example, have your investors ‘bought into’ your key purpose and mission?
In order to assess the suitability of a potential investor at any given stage, I like to visualise a matrix of sorts. The matrix features two key factors: Involvement (how involved/uninvolved is the investor going to be); and the Non-Financial Value Add (how informed and important is the investor going to be).
Ideally, you’d like every investor to be both highly involved and highly informed (with expertise and experience in the sector). On the other end of the spectrum, the worst-case scenario is having an investor who is highly involved but uninformed and inexperienced in your sector. This scenario often leads to conflict and tension as each side tries to exert authority and influence over the business.
While there is no exact science to choosing the right investors, these basic guidelines – combined with sharp instincts and intuition – should place you, and your business, on the right track.
First published in Entrepreneur SA online
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