Beginning Your Startup Journey: Getting an Investor

So, you finally decided to start your own company. You have a well thought out idea and a great team to help you make this idea a reality. But building a startup costs money, and you need an investor.

Welcome to the Pre-Seed Round.

Pre-seed usually refers to a company that is entirely new: long before your first dollar in revenue or even a finished prototype. This stage of your company will most likely be the most difficult time to find an investor, which is why most startups in this stage prefer to bootstrap (which is a perfectly valid — and sometimes better — option, but often just isn’t possible).

You may be able to find a decent investor through your already established network, but your best bet is to engage local startup/entrepreneur events (ie pitch nights or Startup Weekends). But how can you tell a good investor from a mediocre one? You may say “it doesn’t matter if they’re good, I just want money,” but angel investors normally play a fairly large role in the early stages of your business, so you want someone who can actually help you and add value to the team. Bad investors have ruined many startups.

You’ll know a good investor by what they focus on. A good angel investor focuses on three things and nothing else:

1. The Idea — While execution is much more important than ideas, nobody at this stage yet knows what the execution will really look like. The idea is the first step, and investors will want to know how valid the idea is, how unique it is, and how big the idea can get.
2. The Team — Possibly even more important than the idea, good investors make most of their decisions based on startup teams. They need to know that your team is competent and inherently ambitious. Building a startup will not be easy and your co-founders must be able to endure the hard times. Whether or not the team can get along and work together under pressure is also absolutely relevant to investor decisions.
3. Insights — This is a combination of both of the previous items. Where did the idea for your startup come from in the first place? What do the members of your team know about the problem you’re trying to solve that others don’t? What experience do you have in the sector your startup is in? What made you feel so strongly about this problem that you decided to start a company on it? These questions are extremely important, and good investors will definitely ask them.

That’s it. Seriously. Now here are the things that good startup investors won’t focus on:

1. Business Model — Wait what? Yep. The business model is very important in any business, but for a pre-seed/pre-revenue startup, it doesn’t hold that much weight. Also, a good investor knows that a startup’s business model will probably change many times — and sometimes change drastically — over the course of its life.
2. Revenue/Profit Projections — It’s good to have financials, but any projections you give an investor at this very early stage of your business will end up being completely, 100% inaccurate. Also, a good investor will already have a good idea of how big the startup can get and how much revenue it can make. It can be a good conversation, but not inherently relevant to the investor’s decision.
3. Valuation — Valuations become quite important in later funding rounds (usually Series A onwards), but again, at this stage, it’s not very necessary in an investor’s decision-making. Face it, neither of you at this stage will know whether your startup should have a $500K valuation or a $5 million valuation. (This may not be the case in Silicon Valley where everyone’s gone valuation-crazy, but in smaller markets such as the Bahamas, valuations are a bit irrelevant.)

So if you’re going to give up a chunk of your company to an investor, try to make sure they know they can add value as well. Also, never let a single investor get more than 20% of your company. Just don’t do it.
Last but not least, funding from investors should always go towards building your business, not towards salaries.

That’s it. Godspeed, young entrepreneurs.