I got a question from a friend Abhinav Sahai, as a follow up to my post “Does who you raise money from limit or grow the size of your ambition?”
What are the parameters that one should look at when choosing ‘who’ to raise money from?
I am going to give you the easy answer first to the question. This is based on my observation that most entrepreneurs find it extremely hard to raise money for any number of reasons – positioning, not being in the network, not having sufficient traction, etc.
The answer is “Whoever is willing to give it to you”.
For over 80% of entrepreneurs that answer should be sufficient, unfortunately.
Lets assume though that you are in a position to receive interest from multiple investors and you have to make a choice. Or you are going about your fund raise in a strategic fashion and are looking to target specific investors who you’d like to bring on board at your startup.
The overarching theme to address this question is to bring folks who provide “Smart Capital“.
Most investors will give you money. That’s why they are an investor.
What you need in addition to the capital is what you should be looking to get from investors if you have the choice.
1. In some cases that might be connections and networks – to other investors, to potential customers, partners or future employees.
2. In other cases it might be expertise and insights – how to address questions that you will face while you scale and grow your startup.
3. In still other cases it might be credibility and advice – being associated with top folks in your industry gives you a leg up over others.
4. In still other cases you might just want someone you can trust and sound ideas off. Knowing that your startup journey is going to be long and lonely means you need folks to help keep your morale up or to help you gain perspective.
They may be more things you might need in addition to capital, but most will fall into these 3-4 buckets.
Typically most folks will tell you that they can bring their expertise and connections.
If you can be strategic about your fund raising (meaning you have good runway, or have great traction), then I’d highly recommend you look at your fundraising as a project that the CEO undertakes herself.
It will take about 3-6 months (elapsed time) from start to finish, so you should be willing to be patient, and consistently follow up as with any strategic project.
So the question then becomes how do you gauge if someone has expertise or connections?
The simple test is to ask them questions you face daily and look for depth of the answers, the breadth of their knowledge and the ability for them to customize their learning to your needs. That will give you a sense for their expertise.
The depth and breadth of their network is also easy to test – ask them to introduce you to 2-3 people you have been trying to meet to help validate your plan.
Above all I’d highly recommend you reference check. Talk to others in their network who they have invested with or other entrepreneurs they have invested in to get a sense for the investor.
The most critical question you can ask is how they respond to tough situations.
100% of all startups go to hell and back before they are a success or a failure. When you have supportive investors to help you along the hard journey, it will be a lot less stressful.