How to Conduct Investor Research for Early-stage Startups
FUNDRAISING STRATEGY FOR EARLY-STAGE STARTUPS (№4OF SERIES)
I. Why The Investor Research Has Strategic Value
Many founders don’t conduct investor research in a systematic way, not to mention build a personalized data center for such information. They usually start with their network and then extend to first or second degrees of introductions from that network. Beginning with what you have is smart, but it is not enough or effective. Thinking about what you need first and trying to extend the outreaching to that scale will empower founders to control the fundraising process better and gain a more consistently successful result.
Founders consistently told me that first-round fundraising is extremely challenging. They usually have talked with dozens of or even up to 100 investors to get funding, sometimes not yielding the amount or deal terms they were initially seeking. Quite a few of them tell me they regret the way they initiated the fundraising. They start with what they have as most other founders do, and get stuck with their limited network or knowledge of the market.
Above is the simplified VC fundraising process for early-stage startups. Imagine the process like a funnel. Investor research should be considered a must-do prior to fundraising. It should be based on two principles: targeting the right investors, and doing unbiased research. It is part of the strategic plan. On one hand, it gives founders a deeper assessment of the relevant market, and on the other hand, helps founders to seek beyond their blind spots. The research will be concluded as a valuable list of stakeholders who may genuinely fund and partner with your startup.
II. Make a Fundraising Plan (Finance Plan) even Before Investor Research
Before doing anything, the founders should have clarity on the following:
whether VC fundraising is the only choice or there are alternatives, e.g. can startups do pre-sale of services/products, crowdfunding, etc.
the financial projection with the funding
with the fund to be raised, what milestones are to be reached for the next round of financing or a breakthrough
Understanding these will help founders have a good sense of the funding goals, which will further help founders to narrow down or expand investor research. For instance, if founders have confidence that $500k should be enough to make the business profitable, they may want to focus their research more on angel investors and accelerators rather than VCs. On the contrary, if the founders conclude that they need more than $2million to get them to the next milestone, it may be a better idea to spend more time on researching VCs.
III. What to Research on Investors
I’ve made an investor research management sheet for founders’ usage before they outreach investors. I will explain below how each column captures the value points of an investor. (If you want to have this template for your own usage, send me an email at firstname.lastname@example.org. It’s free!)
Investor’ web: This is to record the investor’s profile page. Most investors have an informative homepage to display their team, portfolios, and fund information. Angel investors tend to use AngelList, LinkedIn, or their personal website to display such information.
HQ/offices: If you and the investors are in the same city, that will be most ideal. If not, that’s fine too. Many investors invest in global markets. But be mindful about where they operate the business so that you can arrange pitch meetings in a condensed business trip schedule.
Types: This is highly relevant information. As I’ve shared in my previous articles (VCs vs. Angel Investors), different types of investors have different business focuses. Stage and industry are the two most important differentiations. Types mainly refer to the stage of investment preferences. It may be angel investors, accelerators, incubators, seed funds (only investing in seed round), VCs, and CVCs.
Sector: Some funds may broadly label their investment sectors for customers or for businesses. Some funds may focus on certain verticals, e.g. cybersecurity, FinTech, biotech, sports. If the investors don’t cover your startup’s sector or stage, you are likely wasting time in pitching to them. However, for some funds who cover the startup’s sector but invest in growth stages, it is recommended to keep track of such investors for the follow-on fundraising in the future.
Currently active: As an outsider, it’s just impossible to get an inside and accurate assessment of how the investor deploys its fund. There are some dimensions to help to measure whether the investor is likely active in investing in your type of startups or not. One way is to check their investment track record in the past 6 to 12 months. Another way is to check their fundraising information; how many years has it been since the fund closing? If it’s more than 5 years, there’s a higher chance that they are either running out of capital or running out of their investment period in their fund mandate.
Relevant deal(s): Mark the deals that have relevance with your startups. It could be the potential competitor, the potential partner, or the companies in the same ecosystem. For competitors, founders need to discern whether the investor is still approachable and what the right approaches should be if you decide to reach out to the investor. If the investors are not leading investors in the competitors, they may be interested in investing in your startup. For potential partners, keep in mind that investors like the companies who do business with their portfolios. These potential partners could make the most effective introduction to the investor. For the companies in the same ecosystem, it means investors are deploying funding in the domain where your startup is. These investors may be more interested in your business.
Partners: Track the partners who make the decisions for the investment of the relevant deals. VCs have different partners focusing on different sectors and/or stages. Even if you locate the right investor, you need to talk with the right person (partner) who covers your area of business.
Deal Size/Leading/Investment time: Such information will not only benefit fundraising but also provides insights to founders for the relevant markets. Founders may use them as a benchmark for fundraising as well as business. The deal size helps founders get a sense of whether the investor’s check size is what you are looking for.
Added value: Many investors provide help to startups besides injecting capital. They help with hiring employees, finding advisors, introducing customers, developing PR strategy, doing following-on investments, etc. Founders shouldn’t be shy to ask for help from investors. If founders are in a position to choose investors, use these perks to differentiate them.
Pitch points: An upside to developing investor research is to prepare a founder’s outreach and pitching strategy to investors. Every investor ultimately cares about maximizing ROI. However, it’s the individuals that founders will interact with. When founders do research, founders also know better about the investors’ characters and preferences. Utilize these to form effective tactics to reach out to prospective investors and sharpen the conversations.
The investor research should be an ongoing log for founders. As mentioned, it could be beneficial for future fundraising and also market analysis. Founders should carve out dedicated time before fundraising to do the research, and also should record the relevant information when it comes to the founders’ attention. Treat it as a database for your startup. The more you build, the more value you will find in the long run.
This article should not be construed as or relied upon in any manner as financing, investment, legal, tax, or other advice. Readers should consult your own advisors as to legal, business, tax, and other related matters concerning any financing or investment activities.