Intro

Whatever stage your business is in when you launch your fundraising efforts, you can find the investor support that you’re looking for. Now that you’ve determined the fundraise structure that matches your needs and goals, it’s all about finding the investors that make sense.

All investors are not created equal.

They may all have capital, but professional investors tend to have very specific targets for which types of investments they are looking at. They may be very early investors who tend to be the first money in a deal, looking for the biggest return on a small amount of capital. They may be an ex-Founder who made her money in biotech and is only looking for similar industry opportunities. They may be based in your local community and only prefer to invest in that area.

One thing is common – they all have very specific preferences. If you don’t know what those preferences are before you start reaching out to prospects, you’re going to waste a ton of time.

The Three Key Investor Criteria

one

Investment Stage

Different investors invest at different stages of your startup’s growth. It’s important to understand which stages exist so you know which investors to target and which ones to avoid.

two

Investor Type

Each investor, from angel investors to private equity investors, look for certain requirements in the businesses they fund. You’ll want to align your search with the investors most likely to be interested in your type of startup.

three

Investor Preferences

Just because an investor fits your stage and type, it doesn’t mean she is interested in investing in your city. Or she doesn’t understand your industry. The list goes on. Investors are extremely picky so it helps to understand how their preferences work for or against you.

The Search Begins!

Once you understand each of the key selection criteria for finding your investors, the next step of course is to figure out where to search for them and how to build your contact list. We’ll discuss each of the various sources for finding the best possible investors and how to do some solid investor research and prep.

Step 1: Investment Stages

Startups raise money in a series of stages based on how much growth and evolution they have had.

Think of it like a kid going to school. There’s elementary, middle school, high school and college. Each of those stages represents an evolution of the student, and there are a number of teachers who specialize in helping students at each stage.

Startups are the same way. If you’re just getting started (the Seed Stage) you’ll be talking to different investors than if you have already raised money previously and are in the Expansion stage. These aren’t strict definitions, mind you, but just general epochs a company goes through as they grow.

The Four Stages of Investment

Investors tend to gravitate toward a stage of a startup’s lifecycle that they are comfortable investing in. It generally follows that the more money you want to invest, the later the stage that you invest.

Category

Amount

Seed

Early

Expansion

Late

Friends and Family

less than $100k

X

-

-

-

Angel Investors

$10k - $1.5m

X

X

-

-

Venture Capital

$1m - $100m

-

X

X

X

Private Equity

$20m+

-

-

-

X

You’ll notice a bit of a “hand off” between investors and each stage. Friend and Family may invest the first $50,000 because they know you personally, but the next $250k may come from professional angel investors who have more capital to put to work. Later on, if you look to raise $2 million, you’ll likely be talking to venture capital firms who are looking to take on riskier investments, but only once those companies have shown meaningful growth and promise.

Understanding Each Investment Stage

The stage of your business pretty much tells you who you should be talking to. More importantly, it tells you who you should avoid talking to since pitching a “Late Stage Investor” with the idea you had last night is going to be a huge waste of time!

Seed Stage (less than $100k)

Friends and Family, Angel Investors, Incubators

Seed Stage is the most formative stage of a startup. Although it typically starts with the idea, the reality is most seed stage startups looking to raise money have more than just an idea – they have already been working on a prototype of the product, have a business plan in mind, and have begun figuring out where they are going to acquire customers.

Seed stage investors tend to be the first money in and often have some sort of connection or relationship with the Founder. The investment amounts tend to be small because the idea is still in its infancy and therefore it is more of a bet on a general concept than an actual company.

Key Requirements:

  • Business Plan
  • Minimum Viable Product
  • Some Customers
  • Founding Team

Early Stage ($10k - $1.5 million)

Angel Investors, Venture Capital


Early-stage companies have usually achieved at least MVP (minimum viable product), meaning their product or service is being provided to at least a small test subset of customers, and is meeting with customer approval. Early-stage companies are also often generating enough revenue to be worth talking about, although that varies from company to company.

Key Requirements:

  • Functional Product
  • Paying Customers
  • Early Key Team Members
  • Early Growth

Expansion Stage ($2 million - $50 million)

Venture Capital, Private Equity


By the time you are searching for Expansion Stage capital amongst venture capital and private equity investors, it’s clear that your business has major upside potential. You may not have strong revenues yet, but you may have just developed the next Facebook. The investors at this stage are looking for companies that have proven they have found “lightning in a bottle” and just need a bit of a turbo boost to really accelerate.

Key Requirements:

  • Significant Revenue ($5m - $50m)
  • Huge Market Potential ($100m - $1b+)
  • Strong Market Leadership

Late Stage ($50m+)

Private Equity, Investment Banks


Once a company has built a product that’s become a darling in the market, that’s when the Private Equity and Investment Bankers show up. These folks aren’t looking for a lot of risk – they let the angel investors and venture capital firms deal with that. They are looking to put massive sums of money into companies that are already winning to allow them to secure their leadership position. If you make it to this stage – you’ve won!

Key Requirements:

  • Significant Revenue ($50m+)
  • Market Leadership Position

Step 2: Investor Types

Whether you need to expand your team, pay for product development, or just feed yourself, at a certain point you may need to seek outside sources for a capital infusion.

Fortunately, there are many different avenues you can take to find funding.

While banks or federal or state governments may be suitable options for some companies, this playbook focuses on a few of the types of investors you can pursue when you’ve exhausted those options, such as friends and family, angel investors, and venture capitalists.

Friends and Family (less than $100k)

While a bank or independent investor might be hesitant to risk money on your venture, your friends and family might be more willing to take a chance on your vision.

With individual rounds typically raising around $25,000 to $150,000, seeking investments from your personal network be an ideal way to raise seed money to get your company off the ground. These close circles generally consist of individuals most likely to feel a strong affinity for your brand -- or, simply, to you -- motivated more by loyalty and support than a return on investment alone.

Securing capital from friends and family can also act as an effective stepping stone toward future investment deals, as it demonstrates to potential future backers that you’ve validated your business plan among those closest to you.

However, mixing business with family is notoriously risky, and for good reason. To that end, it is of the utmost importance that all investments are thoroughly documented. You should require that they sign a document acknowledging the risk and clarifying that they may not get their money back.

Before accepting any money, do some soul-searching to be sure that your ties are strong enough to withstand any worst-case-scenarios. Have each party sign a promissory note spelling out the repayment terms or, if you’re partnering with a friend or family member, sign a partnership agreement.

Angel Investors ($10k - $250k each)

An angel is a high net worth individual who invests directly into promising entrepreneurial businesses. This capital usually allows the startup to accomplish some of the early milestones like building out an MVP, generating revenue, etc.

Quick facts about Angel Investments:

  • There are over 300,000 active angel investors in the United States alone
  • Median funding round size for angel investments: $950,000
  • Median investment amount per angel group: $127,000
  • Median pre-money valuation: $3.65MM.

While certainly savvy businesspeople, angel investors are also less likely than venture capitalists to get caught up in bottom lines and profit margins, and might not be as apprehensive about the numerous unknowns that often come attached to seed-stage investments.

Angels can be an ideal fit for startups because their personal interest in the healthy growth of the business and their own litany of past successes and failures often prompt them to act as mentor and coach to their portfolio companies. Many angel investors also belong to networks of other angel investors. These networks, or “Angel Groups,” pool their money and invest as a group in the deals they like the best. These networks are also beneficial to startups because it can make it much easier to raise larger amounts of capital.

Venture Capital Firms ($2 million - $50 million)

Of the four investor types, Venture Capital firms write the biggest checks with an average investment size of $2.6MM to seed stage companies.

VCs are in the business of reviewing, assessing, and investing in new and emerging businesses. As a result, they look at a very high volume of deals, and on average only invest in 1 out of every 100 deals they consider — compared to angels, who invest in 1 out of every 10 deals. Furthermore, VCs conduct significantly more due diligence than angel investors, spending an average of 5 months vetting each investment opportunity.

Venture capital is consistently an active, rather than passive, form of financing. These investors seek to add value, in addition to capital, to the companies in which they invest, both to help your company grow and to achieve a greater ROI. This means virtually all VCs will want a seat on the Board of Directors.

Although most VC firms will have a website, or other means of sending in cold call solicitations, it is always best to have a referral to a VC by a mutual acquaintance.

This is one of the many benefits of equity crowdfunding: by asking your existing supporters to share your fundraise with their own networks, you open yourself up to the possibility of making connections that you may have previously thought were impossible.

Private Equity ($5 million - $100m+)

Private Equity (and investment banks) are designed for relatively mature companies that are beyond the “will this work?” phase and are onto the “how big can this possibly be?” phase. They operate massive funds that are more focused on smaller multiples than angel investors or venture capitalists, but more guaranteed returns because there is less risk involved in funding an already successful company.


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