Once you’ve determined how much money your startup requires from your financing roadmap and that outside investment is the strategy for you and your business, you should determine which investors to contact about the investment opportunity.  Entrepreneurs must realize that each investor group or venture capital fund has a unique investment focus.

Initial screening of investors

As part of the early stage vetting of potential investors, do your research to identify firms or individuals that have invested:

  • In your target industry sector
  • At your company’s stage of development
  • Amounts that match the range of your target financing round
  • In your geographic region or are willing to invest there—many early-stage investors prefer local investments or those to which they can travel within one to two hours

Identifying your startup’s ideal investor

When investigating a specific investor, speak to advisors and other entrepreneurs who have worked directly with the investor. You want an investor who:

  • Has extensive business experience with prior startups and knowledge of the target industry for your venture
  • Has other investments that are complementary to your business
  • Takes a collaborative approach and demonstrates a desire to help founders enhance your company’s investment appeal and build the business
  • Has strong networks for business development and the ability to fill in the gaps in your business plan (for example, helping to build management team, board and advisors in early-stage ventures)
  • Is willing to invest time, skills and money with founders
  • Is well connected in the investment community (both locally and internationally) with investment partners from the fund’s network that may be attractive co-investors for your financing
  • Has a solid track record of leading or making investment deals happen
  • Has a history of successful business building and exits, with strong networks for business development for your venture

Investors will also use these criteria to evaluate new opportunities. Find out as much as you can about potential investors to make the best approach.

Where to find investors

The following organizations publish lists of their member firms on their websites, as well as a brief overview of the companies’ investment strategies:

Once you’ve narrowed your prospect list, visit each company’s website, review their investment criteria and examine the background of investment managers to find the best match for your opportunity.

As a strategy, target one group of investors at a time (preferably fewer than ten investors on your initial approach) so that you can effectively manage the communication, meetings and follow-up should several investors indicate interest in evaluating your opportunity. Investors are part of a very small community and often invest together in deals. Investors usually know each other well and share ideas about deal flow, so they are likely to be aware of other investors with whom you might be speaking. Keep in mind the concept of “deal fatigue” (when a deal or opportunity begins to feel tired and shopped around to too many investors), especially in a smaller market with fewer players. Ensure that your opportunity is fresh so that investors do not feel like the deal has been shopped around too much before they’ve seen it. After you’ve approached your first group of investors, consider waiting until you’ve reached your next milestone before trying again with the next group.

Your professional and business advisors may have access to software that lists private equity-backed companies, VCs, buyout funds and private equity firms.  By monitoring which firms are investing in what types of companies, you might be able to target investors that would be interested in your specific opportunity. Dow Jones VentureWire provides a free daily alert service.

References

Tech Capital Partners.“Securing Venture Capital for Your Early Stage Technology Business.” Retrieved April 8, 2009, from .
MaRS. “It’s Negotiable: A Guide for Entrepreneurs.” Retrieved May 16, 2014, from http://www.slideshare.net/webgoddesscathy/entrepreneurship-101-negotiations.
Kawasaki, G. (2004).The Art of the Start: The Time-Tested, Battle-Hardened Guide for Anyone Starting Anything. Toronto: Penguin Canada.