Make Sure Investors are Good Enough for You

This week's tip: the 5 ways to research investors to make sure they are good enough for you.

Fundraising can often feel like a one-way street, with investors holding the power and deciding where to invest their money. In this dynamic, it's easy to focus solely on pleasing investors, rather than ensuring that they are a good fit for your business.

However, it's actually better to approach fundraising as a two-way street. Every interaction with a venture capitalist is a learning opportunity for them, and due diligence should go both ways.

In fact, if a founder didn’t do their own research on us, it was a massive a red flag for us. We thought that they may not be thorough in other aspects of their business if they couldn’t even do simple research on whether we were good enough for them. It's important for both parties to determine if they are a good fit for each other - don’t forget that. This should be starting from before you even meet us, but also in the first intro meeting.

By researching VCs, you can come from a position of confident equality, rather than weakness. The beauty of this is it will make investors like you even more; giving you a higher chance of fundraising.

So what should you research when considering VCs?

Here’s 5 ways:

1. The Investor’s Team

Where many founders mess up mindset-wise is by not realizing that getting investment is just the start, not the end goal. Once the money is in the bank, it's the beginning of a potentially decade-long journey of being closely connected to your investor. You will experience both challenging and positive times.

This is why it's so important to find a fund that will help you as much as possible on your journey to succeed in changing your industry.

Think of this in two ways:

• Expertise: You are seeking investors who have operational and investment experience. You want partners who have been through the process and can help you at every stage of your journey. This was a major reason why my previous fund, Octopus, won so many deals in the cognitive behavioral therapy space. We invested in multiple companies within this expertise, and founders appreciated our experience. Another example of what founders appreciated was our dedicated team that helps portfolio companies. We ensure that every founder we back has multiple touchpoints with the fund, particularly in areas such as mindset, hiring, and sales.
• Communication: One of the worst things that can happen is when an investor ghosts you or doesn't give a clear indication of how they feel about your company moving forward. If the investor is a VC, it's important to know who you will be in contact with going forward. Will it be just the investor leading the investment, or will other members of the team be involved too? Here's a quick tip: focus on funds that allow you to meet other members of the team. This way, you can ensure that multiple people in the fund have met you and are excited about what you're building. This is so important to make sure you don’t make the fund lose interest in you.

2. The Investor’s Investment Thesis

The average relationship with an investor tends to last longer than the average marriage. As you build your company, there will be many lows and unknowns.

It is crucial to only seek investment from investors who understand your industry and are committed to the long-term success of your business. Some investors may not fully comprehend the sector you operate in or be overly enthusiastic about your vision. To avoid such investors, make sure to ask about their experience investing in your industry and the extent of their research in your sector.

Additionally, ask for their thoughts on the industry and how they foresee the future based on current trends.

3. The Investor’s Value Add

One of the biggest benefits that an investor can provide is ensuring that you are able to raise future rounds of funding. This can be achieved in two ways:

1. Introducing you to potential investors and future sales opportunities.
2. Providing operational assistance to ensure that you meet your milestones.

However, it is easy for investors to claim that they are "value-add," even if they don't actually provide much help. In fact, less than 50% of founders report that their investors are truly value-add.

To ensure that an investor will actually help you with the areas you need most, it's important to ask for references from their current portfolio. Treat this process like hiring, and do the following:

1. Ask the investor for references from their own portfolio (keep in mind that these will likely be founders who have succeeded, although some funds like Octopus also include references from failed founders).
2. Reach out to other founders who haven't done as well (you can often find them on LinkedIn) and ask for their perspective.

4. The Investor’s Track Record

If an investor has few successful companies in their current and exit portfolio, it's a big red flag. This indicates that they either have poor company selection skills or they don't provide sufficient support to the founders in building successful companies.

To avoid this, research the investor's track record and ask them about their portfolio successes and how they helped achieve them. Ask yourself/them:

1. Do they do follow-on investments?
2. Do they introduce you to other investors or stakeholders?
3. Do they take board seats and provide operational expertise?

5. The Investor’s Investment Terms

Especially at the earliest stages (pre-seed to seed), there are a lot of "sharky" investors giving founders horrible deal terms. If this happens, you should run as far away as possible from them! However, you can ensure that the financial and control elements suit both sides.

To do so, you need to consider the following:

1. Share structures going forward
2. How governance will change (especially on the board)
3. How much control they have during the pivotal moments of your company
4. What happens if the person who leads your investor leaves the fund whilst you are still building your company

In conclusion, relationships work both ways, and as I always say, fundraising is a relationship game! Just because an investor has money, don't forget to do your own research on them.

It's just as important for you to make sure they are a good fit for you as it is for them to do the same. And fortunately, having this mindset will make them like you even more.