Finding The Perfect Angel Investors
Before founding my startup Greta, I’d heard many nightmare stories about never-ending fundraising processes and evil investors. So guess my happiness when I, only 4 months after quitting my full-time job, had signed investment documents from a bunch of angel investors in my hand. And not just any angel investors; a whole group of kind, smart and experienced people whom we really wanted to work with.
When I mention to others that we love our investors, I’m more often than not met with surprise. As I talk to a lot of people thinking about starting their own companies, who are finding the part with investors tricky or even scary, I’ve decided to share some personal thoughts and experiences on the matter.
Understanding your own case
Before you start talking to investors, it is absolutely crucial that you understand your own case inside and out. My co-founders and I spent endless nights and weekends before quitting our jobs looking at our own startup from as many different angles as we could think of. Learn everything you can about the market you’re entering; what’s happening there and who are you up against? Who’s tried what you want to do before? Did they succeed or fail? Why?
A good piece of advice is to ask the smartest people you know to try to “break” your case, i.e. pinpoint your weak areas as a team, the risks you must be aware of and the problems you must solve. It is easy to fall in love with your own idea and therefore miss, or even be reluctant to start thinking about, the holes in the case. It is your responsibility as founder to understand not only why you might succeed, but also why you might fail.
It is often said that being naive is a good characteristic of a startup founder. Whatever you do, don’t confuse being naive with being uninformed or unprepared.
Learning what others already know
Different startup ecosystems will have a set of commonly known “truths” that people refer to when it comes to investing. You’ll constantly hear phrases such as “a typical seed investment”, “a smaller ticket size”, “a normal angel round”, and, like most people who haven’t raised money to fund a startup previously, you’ll secretly think “WHAT THE HELL DOES THAT MEAN?” and feel like the dumbest kid in the room. Don’t feel discouraged if you find yourself in this situation — fundraising is exactly like golf or the stock market in that sense; a lot of people will try to make it sound more complex than it really is.
My best trick here is the lunch-strategy (which by the way applies to being a founder overall): ask other startup founders who’ve taken in investors previously, or people who know the ecosystem well, if you can take them out for lunch and ask them about their experience. During these lunches, don’t try to play it cool, but instead be transparent with what you don’t know. Asking is often the only way of learning. My experience is that most people will be extremely helpful and transparent when you ask them for help.
Finding investors you’d give shares for free
When looking for investors for Greta, we created a very basic rule for ourselves. We would only bring in an investor when we answered yes to the question “Would we give this investor shares even if she or he didn’t pay for them?” The purpose is to evaluate if the investor will add more value than just money, and is another way of saying “Do I believe that 98% (if you’re giving away 2%) of this company is worth more with this investor, than 100% without this investor?”
If the answer is no, find another investor.
To know the answer, think about what would add value to your particular case. For us, what we believed would increase our likelihood of succeeding was credibility in building technical startups, experience in building teams and scaling, and contacts in relevant industries. Those were things that we as first time founders simply didn’t have. Other founding teams might have a completely different set of things they are lacking in the team, for example domain experience or marketing skills.
Once you know what sort of competence and profile you are looking for, start hunting. Don’t expect to “stumble upon” great investors — it’s a lot of hard work and a lot of wrong stones to be turned. Can you use public resources such as LinkedIn, Crunchbase and articles to learn what investors seem especially interested in your field? Many investors are more likely to invest in an area they are familiar with themselves, so have a think about who’s successfully built startups in your space before you. Even if they don’t invest themselves, they might be able to point you in the right direction. In my opinion, it is absolutely fine to reach out to people you don’t know whom you expect might have relevant contacts. Explain your case, and always be kind and humble about asking for help. Worst thing you can get is a no.
If you find an investor who you like and who is interested in your case, don’t be afraid to ask her or him to make intros to additional investors that they think might be relevant for your case. If an investor believes in your company enough to invest, it shouldn’t be a problem reaching out to a few other investors to say “hey, this is an amazing startup I’m gonna invest in, you should look at it.” This is how we closed our angel round: we got introduced to a great investor who later helped us find another great investor, who in turn helped us with further intros. If the investor is not willing to share her or his network during the investment round, ask why they would after they’ve invested. Remember that it is also in the investors’ interest to find skilled and relevant co-investors, so make them put in some work. If they’re unwilling to help, take your shares and run far, far away.
Another word of warning when talking to investors. Don’t buy into the whole investor rhetoric of “we’re extremely busy and you should be happy if you get to pitch us for 30 seconds.” If an investor treats you with arrogance, I believe that the arrogance in itself is reason enough to step away. But even if you are willing to tolerate a dose of rudeness every once in a while (but trust me you shouldn’t), I would have a think about what that type of rhetoric says about how the investors will treat you after they’ve invested. Will they only have time for you 30 seconds every month? Or are they so uninterested and uninspired by your idea or domain that you’re at the bottom of their priority list?
I once received this brilliant advice from an investor: “after meeting a new investor, ask yourself if the discussions you’ve had made you any smarter. Did you learn something new? Did the person ask questions you hadn’t thought about? Did the person bring new angels to the case?” If you feel you’ve just been wasting another hour repeating the same answers like you’ve done a hundred times before, that’s a bad sign. A good investor will give more energy than she or he costs; never accept anything less than that.
Controlling the process and closing the deal
The process of finding the relevant investors for your company will for sure be tedious and extremely time and energy consuming. A good guiding principle is therefor “better a short no than a long maybe.” Be very careful to not waste your time on investors that are never gonna go ahead and invest, but rather just want to feel relevant by “being in the loop”. However, be aware that this is different than spending a lot of time with relevant investors to discuss your case.
A crucial aspect in closing an investor deal is finding momentum. To do so, you as a founder must be the one in charge of the process. Don’t let investors say “I’ll get back to you in a couple weeks’ time” — you need to own each step and be the one driving the process forward. Never walk away from a meeting without having a clear next step and a time frame for that step. Be honest about your timeline and when you expect to have their decision.
Having worked with negotiations in my previous job, I’d be the first to say that negotiations are all about trust between people. If you get the feeling that “this person is trying to screw us” — don’t make the deal. In the same way, don’t try to outsmart the investors you are talking to, because this will only hurt you in the long run. As soon as someone has said yes to investing, treat them as though they are on your team.
One of the best pieces of advice I’ve gotten in my entire life applies not only to an investment discussion, but to most things in doing business overall. The advice is; “Be soft on the people, but tough on the issues.” The point is that you can always be kind and respectful to the people you are dealing with, but at the same time hold extremely firm on what’s important to you. Just because you’ve found an investor that you like doesn’t mean that you’ll have to accept all of that investor’s terms. The same applies with an investor eager to tweak your startup in a direction that you’re not comfortable with. Soft on the people, tough on the issues. And always remember, you are the one in the driver seat.