Choosing your investor

I have read lately blogs and articles on how to attract VC investors to your startup but none on how to select your investor. Currently in Europe there are more funds raised in venture capital funds than ever (Euro 5B invested in 2015) and the European business angel networks are more active and sophisticated than ever (all this can inflate valuations to unhealthy levels but that calls for another blog). The reality is good startups with a solid business plan and teams are and will be funded. If not, there is still something missing in the management team, the business and its plan, or the way it is presented to all the most relevant and potential investors.

With all the money floating around to be invested it is equally important for the entrepreneur to choose the right investor. Selecting the right investment partner that is expected to create value, joins the board and gets the usual controlling and veto rights can have a big impact on the company’s success and outcomes. In good and bad. So how do you select the investor ? There is no simple rule but here are a few points to keep in mind:

1) The investor knows what to do and prioritizes

So the investor wants a board seat to steer and support the development of the company. To simplify the investors’ 3 most important missions in the board is to 1) make sure the strategy is right, 2) the company’s CEO and key management is capable and the best for executing the strategy, and 3) enough financing and resourcing is secured to execute. All operational, management sparring, hiring, syndicate alignment and other added value is very important but clearly comes after. If the above 3 tasks are not crystal clear, constantly reviewed and aligned and prioritized other added value may become inconsequential. This is self evident but in reality there are many investors out there that do not, are not capable, or overlook this order of priority. Individual investors that have an entrepreneurial or industrial experience but no VC nor investment background may have the tendency of investing in companies where they feel they can bring operational added value but overlook the strategic perspective and bigger market picture and dynamics. I would be cautious about investors claiming to specifically create value in certain functions based on previous entrepreneurial experience. Every company has its own dynamics and just repeating past functional operations in another company with different set of circumstances can lead you off track. If you expect strong CFO, CMO, CTO or go-to-market operational support from your VC you should consider bringing additions or upgrading your management team.

Having your investor represented by someone with pure and only financial background and experience is not the optimal solution either. Sparring and setting out a strategy and a realistic execution plan calls for understanding startup operations and realities. Managing and controlling solely with numbers without reflections on startup operational realities or past investment experience can be a frustrating sparring partner. Ultimately the investors’ performance is measured with numbers and returns but to get there you should expect added value and value creation and not free riders wising off on your Board.

For selecting a VC your best bet is someone with a long and successful investment track record and is backed by his or her team of experienced investors with diverse backgrounds ; financial, operational and entrepreneurial. In addition, you of course prefer to have someone who knows your specific kind of business and has had previous successes in your market. Or to the very least has a clear intuitive sense of the product, competitors and market you are in.

2) The investor is established and represents a good brand

Look for a venture capital firm with several generations of funds raised and with an established brand. While past successes are not necessarily relevant to future firms with well established teams have found the formula for successes and are likely to give you the best support. They have helped startups grow and helped them with successful exits. Established firms and teams usually bring no surprises in turbulent times and have the collective experience in solving them while safeguarding the brand and reputation — the chosen outcome is most likely to be in your interest also.

Well known brands tend to attract also new high-caliber partners and team members to your company. This also supports further fund raising with new venture capital firms.

3) The investor thinks and acts globally

A technology startup needs to think global day one. Accordingly your investor needs to be able to support you both locally and internationally. VC firms that are present in several markets naturally have this advantage. Moreover, internationally present VC’s are known to qualify and benchmark deal flow from several markets which records another quality stamp on your startup and helps building further investment syndicates.

After addressing the EU markets often the next target for the tech company is the US. Seasoned investors have created the network and experience in relocating and establishing EU businesses to the US and attracting local co-investors. The growing Chinese and Far Eastern markets are becoming though at least as important. Those markets are far more complex and local support is crucial.

Tero Mennander
Venture Partner Ventech

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