After collating a list of potential investors, the next step is to identify the right group of investors. There are four critical questions to ask in order to identify the right potential investors.
Does the investors understand the business?
It is important that investors understand the entrepreneurs’ business models and have related experience in the industry. This would help build a strong and long-term relationship between investors and entrepreneurs. Assess how much the investors understand the target market and industry. In order to do so, conduct some background research into the investors’ areas of focus and clients’ portfolios to test their business knowledge and industrial experience.
With VCs, identify VCs by their funding rounds, funding budgets and sectors. If there is a VC that fits into your target industry and business type, don’t get too excited yet. Check if the VC is already investing in a rival startup. If so, cross it off your list. The VC would not be interested in funding a competitor when they are already vested in another company.
Is the investor rich with business connections?
Choosing angel investors who are well-connected is a savvy move. This is because investors with extensive networks play a big role in getting long-term positive returns from the investment. As such, potential investors with rich networks can help connect you to potential partners, vendors, suppliers and even co-founders. Rich connections can also help entrepreneurs to get more business deals from different groups of clients.
What is the investor looking for?
Investors show interest for a variety of reasons. Some want to make easy money with a quick flip. They are invested in you aggressively growing your company to eventually sell your company for a nice profit. Some are invested for the long term and sincerely want to help you build a sustainable business and a good product.
Do the investors have sufficient funds?
Investors need to have an active and sufficient funds before the entrepreneurs accept funding from them. It is possible that the investors do not have enough funding and yet they decided to take investment meetings. In order to prevent such scenarios, it is important to do a proper business validation and due diligence on the background of the investors. There is a possibility that the investors might be investing without sufficient funds.
When looking at VCs, identify what series they usually invest in. No point approaching a firm that specialises in seed funding when you are looking for a Series A as these firms may not have sufficient funds for your needs nor the interest at your stage of funding. Likewise, there is no use approaching a firm that invests in Series A when you are actually in need of seed funding as their interests is not aligned with yours.
As your startup gains momentum, some of these potential investors will start knocking on your door. That’s why it’s imperative that you understand their motivations. In a way, it’s like dating and the courting process has just begun!