Does Every Investor Match Your Start Up?
After having an insightful conversation with Angel investors from MatchingWings (read the full version here), we decided to go deeper into the topic of startup funding.
From the side it looks simple: you need money for your startup, those folks with a LinkedIn title “Investor” have the money. You match!
Unfortunately, this is similar comparison to the statement that if you are a woman every man matches you. Not every, not a man, not matching — there are too many variables to state that.
Moqod: Hi Dennis, welcome! Please, tell us a few words about you and your background?
Dennis: I have been involved in SME’s and start-ups for the last 16 years and made one Seed investment myself.
Hamster connect is a start-up itself. We have released our MVP in August and will launch our first paid package in January 2021. We decided to build Hamster because we saw a gap in the market for a central place that brings together start-ups, scale-ups, investors and accelerators, and because we want to offer smart tools in one place instead of having them spread over multiple providers and platforms.
Moqod: Let’s start with basics: what types of investors are there?
Dennis: There are many types of investors. The first break down you can make is between private investors and professional investors.
They all focus on a different development stage of a start-up/ scale-up.
Although a loan is not the same as an investment it can be a solution for your capital needs.
There are different types of loans depending on the growth phase of your company. Types of loans include bank loans, convertible notes and venture debt.
Moqod: We hear from our startup clients that they are seeking for venture capital most of the time. Why is it so popular to chase for VC money? Does everyone need them?
Dennis: A lot of founders are chasing VC money, but this is not always the right solution. Most VC’s don’t invest in seed or early-stage companies and often require traction. The requirements a VC has after investing are also more rigorous than for example a Seed investor, so you must be careful with that.
When you decide to raise funds you first need to understand the differences between the many types of investors. VC’s are professional investors and are therefore profit focussed. Seed and Angel investors and HNWI’s are private persons. In their decision-making a lot more “emotion” is involved.
Raising funds from a VC’s is not the right solutions for all companies and all growth phases.
Moqod: Is the amount of money that can be raised the most significant factor when picking an investor?
Dennis: Absolutely not. Deciding on what type of investor to target you must answer a couple of questions first:
- Am I looking for money or smart money? Smart money is an investment from an investor that also offers coaching, a network, special expertise etc.
- What involvement do I want or need and what level of involvement can I currently handle? With that I mean most good VC’s will be on top of you. They coach you, share knowledge and experience and will jump in if they see their investment might be in danger. They are focussed on assisting you so their investment is growing.
An angel investor is hands-off most of the time. Usually they want an update every now and then and want to see progress.
- Do I need a next round after this one and can this investor help me out in a next round to?
- Do you click with the investor? You need a personal click with your investor. They will invest in your baby. Your masterpiece, your ticket to financial freedom and/or creative freedom. You will have to spend time with your investor, so make sure it is a great ride for both of you. A personal click and a match with product and culture are very important.
Moqod: How does the current start-up stage impact the choice of the investor?
Dennis: Which type of investor fits best is totally dependent on the growth phase of your company. Your capital need is lower in the early stages than in later stages. VC’s often don’t invest in early-stage companies. They usually carry too much risk, and they require larger amounts of investment. Private investors in comparison are more inclined to take more risk and invest smaller amounts.
This makes a natural pre-selection of investor types.
Summarizing, the top 5 factors influencing the right choice are:
- Growth phase.
- Money or smart money.
- Level of involvement from investor.
- The amount you are searching for.
- Personal click with investor.
Moqod: Usually, it’s a start-up who pitches, but what questions should you ask an investor to ensure you fit each other?
Dennis: The investor will grill you during the pitch. However, it is as important that an investor fits you as it is for you fit the investor. As said before an investor should fit your culture and product and ideally add a huge network and potential clients.
- Are you interested in potentially investing in my company, and if so, what are the next steps?
- What is your investment process, and how long does it take?
- What is your ticket size?
- How many more investments are you planning to make this year?
- Who else needs to be involved to make the decision to invest?
- What is the last company backed, and why?
- Have you invested in a competitor, or are you considering doing so?
- What are your concerns about our business?
- What is your follow-on strategy?
- How do you help companies you back?
Moqod: I assume you need also to be aware of how the other investor’s assets perform. You don’t really want your start-up to be the only hope for the investor. Agree?
Dennis: Absolutely. That is why we advise founders to ask investors about their other investments. Growth phase, invested amount, etc.
Moqod: How about diversification? Is it ok to get money from few sources?
Dennis: Getting money in from different sources is fine. It gives you a broader base, less dependency and more knowledge and expertise at the table. However, it can also add extra difficulties.
One investor might be a better negotiator than the other. So be careful your deals are in line with each other. Second, if you are in later stage and want investment from a VC, they will most probably not like many small investors as shareholder. The VC might ask you to either buy them out or group them together in a separate entity that holds the shares.
With bigger amounts or higher risks investors also might want other investors onboard. They can set up a Syndicate together. With higher amounts of investment there is often one lead investor and several co-investors.
Moqod: What barriers on your flight may arise if you choose the wrong investor to your full potential?
Dennis: The wrong investor can cause a lot of problems. Some examples include that the investor pushes you too hard, the investor doesn’t bring the promised network or knowledge, is not involved at all, personal differences etc.
The result of this can be catastrophic. Delays, misinformation, lawsuits and finally bankruptcy and the end of a dream.
Moqod: Maybe you could tell us an interesting and educating story from your experience?
Dennis: I personally experienced what happens if you do not have the right agreements in place. Twelve months of fighting, €30,000 spent on lawyers and a buy out that only met 20% of the actual amount I should have received. I consider the amounts lost as a tuition fee. I learned the hard way.
A shareholder agreement stipulates what processes and rules apply in certain situations, and the way to put a value on things. Even with an agreement in place a divorce is no fun, but with the right agreements in place the pain is dampened.
Moqod: Wow, they say that divorcing your wife or husband is much easier than divorcing your investor. From your words that sounds like true.
Dennis: In marriages where the partners or one of them are wealthy, you put a prenuptial agreement in place. Just in case the sh*t hits the fan. With investors, but also with co-founders, it is not different. As a start-up and in later growth phases you need to spend time and money on getting things on paper and signed. Seriously, take care of it!
With Hamster, we spent € 15,000 on lawyers, a notary and a fiscal advisor to get all the paperwork in order. And that is a big bite from your seed investment and that sucks. But better pain now than pain later. And I know from experience.
Moqod: Thank you, Dennis, for sharing your experience with us!
We learned from this conversation that the investor’s choice highly impacts the path of business growth. So when you say that you need money for your startup, you rather need a partner, experience, network, insights, accompanied by funding under certain conditions.
We hope this text forces you to think outside the goal of getting funds but brings the idea of balanced collaboration to the table. At the end of the day, what we all want is strong and warm long-term partnerships, not only in life but also in business.