7 Tips to Help You Choose the Right Investor for Your Startup

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Deciding how to fund your startup is complicated. While it’s important to look at how much money each investor brings to the table, there are many other factors to consider, such as what other value the investor offers and if the investor meshes with your company culture. When choosing the right investor for your small business, be sure to consider a wide spectrum of criteria other than money.

1. Have a Clear Understanding of Your Own Goals

As with most important business decisions, it’s best to start by outlining your goals and determining your needs. What do you want to achieve with this round of investment? How much money do you need? What else do you need besides money that the investor can provide? What are your priorities?

For example, if you’re relatively new to business, you may be searching for an investor who can also act as a mentor for you and help you optimize operations and get your startup off the ground. On the other hand, if this isn’t your first venture, you may be looking for an investor who remains silent and hands-off, giving you the freedom and control you need to run your small business.

Have an idea in mind of the ideal investor for whom you’re looking. Highlight non-negotiable qualities that are important for you as well as criteria that are “nice to have” as opposed to “must have". This will help you as you evaluate potential investors who are interested in funding your venture.

2. Research Your Options

When it comes to investors, there are a couple of different routes you can take: angel investors, venture capitalists or private equity firms. The needs you outlined will help you determine which kind of investor is best for you. For example, angel investors may be more inclined to provide mentorship and business guidance. The amount of capital they provide could vary greatly depending on the investor.

On the other hand, venture capitalists may be able to offer larger amounts of capital for your business, but they may also take a larger share of your company. Typically, venture capitalists do have specialized knowledge of a particular industry. However, they may not have the time or inclination to offer mentorship to a new entrepreneur.

Private equity firms or individuals may agree to fund your business in exchange for a percentage of the profits or shares in the company. Depending on their area of expertise, they may also be able to provide guidance on how to scale your business.

Be sure to consider what stage your business is in as well. Angel investors will fund companies in the very early stages, whereas venture capitalists and private equity firms may only fund your business once it has shown some growth potential.

3. Focus on the Partner, Not Just the Money

When you’re figuring out how to choose an investor for your startup, it’s imperative that the investor meets the financial needs of your business so that you have the capital to scale. However, money isn’t the only aspect that makes an investor noteworthy. The personality of the investor is just as important as the funds.

Consider what qualities are important for you in a partner. Do you want to work with someone with whom you have mutual respect? You may be spending a lot of time with the investor in the months or years to come. Do you get along with him? What is his personality like, and how does it mesh with yours?

It’s important for you and your senior management team to work well with the investor, especially if he will be taking on an active role in the operations of your company. Otherwise, your board meetings and management meetings may be derailed due to arguments or petty disagreements. If the investor works well with your team and fits in culturally with your company, then you will likely get more accomplished.

4. Look at the Many Ways the Investor Adds Value

Be sure to think about the different ways the investor will benefit your company. For example, does she bring networking connections in your industry? Does she have knowledge that fills in the gaps within your internal team? Does she have customer relationships that you can leverage for your own business?

Sometimes, this kind of value can be as important as the funds an investor provides. For example, if the investor has deep connections in retail where you’re trying to place your products, then a warm opening from her could help you land several new accounts that you would not have been able to land otherwise. If she has expertise in the manufacturing sector that your team lacks, she could help you optimize your processes and save money.

5. Make Sure There Is Industry Familiarity

If your investors are familiar with your industry, they will be better equipped to help you succeed, which will benefit all the parties involved. If, however, they are newcomers to your industry, they may take extra time catching up on all of the nuances, which could delay your business from entering the market.

Research the investors’ track record in your particular industry to make sure they are familiar with the market, target audience and logistics. If your small business works with government agencies, for example, then there will be a lot of paperwork and long timelines. If the investor is not familiar with this area, he may think that you’re not working fast enough to make a sale.

If the investor knows the ins and outs of your industry, then he can offer guidance on the particulars, such as shaping a unique value proposition, picking the right pricing strategy or improving the quality of a product.

6. Always Do Your Due Diligence

Your investors will do detailed research on you and your business before they make you an offer. As an entrepreneur, you should do the same. Speak to other entrepreneurs whom your investor has funded in the past. Ask them specific questions about what it was like to work with that investor. Find out if the entrepreneurs were able to meet their goals with the help of the investor.

Try to get a wide variety of businesses and names of CEOs from your investors so you can contact people who had a good experience and those for whom things did not work out. It’s important to talk to both sets of entrepreneurs so you can get an idea of how the investor reacts and behaves when the business does not succeed.

7. Ask About the Timeline

Some investors may be interested in being your partner for the long term, while others are looking for a quick and profitable exit. Be sure to ask your investor about the life span of the fund she is using to invest in your business. If the fund has a 10-year life span and it is nearing the end, she may be looking for different growth than if it was the beginning of the life span of the fund.

It’s always best to have transparency when it comes to from where the money is coming and what the timeline looks like for the investment funds the investor is providing to your business. Ensure that the investor’s goals align with your goals and business timeline.