Startup School #2: How to choose an Investor
This blog is a translation of Plug and Play Japan’s Executive Advisor Zak Murase’s blog「Startup School #2| 投資家の選び方（シード〜シリーズA以降）」published on May 10th, 2021. Check out the original here (JP).
Fundraising is a first-time experience for many startups. When and how much should you raise? What is the process going to look like? Most importantly, what kind of investors should you work with?
As startups scale their businesses, the relationship between an entrepreneur and an investor, especially with a lead investor, is sometimes likened to marriage. Finding a good partner can even determine a startup’s fate. Investor selection is so important, yet I see many cases where entrepreneurs spend too much time on their products and services and do not spend enough time selecting investors. This article is part of a 2-piece series, where we go through the key points for startups to consider depending on their stages.
This first half I’ll be focusing on the early phase of starting a business to pre-seed.
How to find the right one for you
Even if you are just starting out, once you have a product concept or a prototype to a certain extent, you will be in a situation where you need funds. At this stage, when you don’t know what the risks are, it’s best to manage under your own finance or rely on someone you can trust, such as your family, close friends, or your former boss, those who know you personally. If you have to ask your outside circle, the first thing you should do is to reach out to an angel investor.
Today, the number of angel investors is increasing in Japan. Many angel investors are former entrepreneurs or early employees of already successful startups. These people have experience in growing startups themselves, so they not only have an understanding of early entrepreneurs but also can give valuable advice and may even refer to other investors and customers.
To find the right angel investor for you, firstly look for someone who is already successful in your industry or a similar industry. You could also look for investors in the space. Angel investors themselves are eager to support startups that can leverage their experience and network, which in turn can increase the likelihood of return on investment.
After listing some investors, it’s a good idea to first see if you have any mutual connections with them. Angel investors who are active on social media such as Twitter, you may get to share your story by contacting them via direct messaging. But the busier they are the more inquiries they have, so they have to choose whom they would respond to. In such a case, they will be more likely to respond to someone introduced by an acquaintance rather than a cold email from someone they don’t know.
Let them know who you are, and why you’re doing this
Once you’re connected, let the matchmaking begin. Not to mention marketing your product or business, but the most important thing is to show who you really are. Investors are aware that the product and business are not fully developed at this stage. Angel investors first want to know who you are. It is up to you, whether the angel investors are convinced to invest in your business despite the risks, and without knowing what kind of product or business you’ll be providing in the future. It is key to make them become your number one fans — wanting to support you, with their resources, thinking they would not regret whether something comes out of it or not. So when you meet potential investors, show them what kind of person you are, why you are doing this, what kind of vision you have and what kind of world you envision.
If they get excited with your idea and say that they want to invest, then great. Congratulations. But you need to remember that you as an entrepreneur also need to be selective about your partner. It is matchmaking from both ends. So if you feel like it’s not the best match for your business, you shouldn’t move on with the investor. Well-known angel investors have a reputation, but otherwise, be sure to check if they’re right for you.
The most effective way is to reference the founders of their portfolio companies. Ideally, you should talk to the person you have directly contacted yourself, rather than talk to the person the investor introduced you to.
Some points to cover are; how they are involved in the startup after investing (the investors who are actively involved are not always the best), whether they provide needed support, their communication style, and whether they are a good mentor that you can comfortably rely on when your business is not doing well.
It’s not easy to part ways with investors, as you would in a relationship. They will own part of your company and in some cases may even be an obstacle in important turning points of your company. It is safer to reconsider if there are any factors that make you uneasy. As long as you have a great product or service, there will be others who will invest in you.
Other Options — Accelerators
At the pre-seed stage, another option you should consider to grow your business is a startup accelerator (*1). In Japan, there are many programs run by major corporations. There are also many programs run by seed VCs, such as Plug and Play, and those run mainly by the government, local governments, and universities. Each program requires different application and investment conditions, duration of the program to be implemented, and support that can be obtained. So you should carefully examine which program is suitable for your company.
In the case of accelerators operated by major corporations, most of them support startups in areas related to or close to their core business. The advantages here are the human or physical assets that the corporation has, and the opportunities that they may provide. Corporations are often looking for new ideas from startups, so hopefully, they become customers in the end. Plug and Play’s accelerator program also aims to help startups collaborate with these corporations.
Accelerators provide other benefits that are different from angel and VC investments. For example, some programs provide coworking spaces and some do not take equity. Accelerators that specialize in particular business areas or founder attributes often provide generous support, such as introducing experts and networks in that field.
When choosing such a program, the reference check is a must-do. Many accelerators publish the names of startups that have completed the program and graduated. If possible, contact multiple graduates and ask them what they were satisfied with, what did not meet their expectations, and how they benefited from the program. You should be able to determine if the program really suits you or not.
In the next article, I will share tips on how to select investors after the early stage(seed to series A). Until next time!
*1) Accelerators: Startup accelerators support early-stage, growth-driven companies through education, mentorship, and financing. Startups enter accelerators for a fixed-period of time, and as part of a cohort of companies. The accelerator experience is a process of intense, rapid, and immersive education aimed at accelerating the life cycle of young innovative companies, compressing years’ worth of learning-by-doing into just a few months. (Ian Hathaway, “What Startup Accelerators Really Do”, published March 1st 2016, viewed May 7th 2021)
