It's time. You have struggled to test your early MVP and you have finally been able to validate your core idea. You got traction, initial feedback is really good and it is time to raise money. Congrats, you have made it beyond the first step, a step that is not that easy to get to.
As a first-time founder raising capital can be a daunting task, so what should you keep in mind while talking to investors? Well, we thought we would share a few of our learnings as well as the feedback we have picked up from other founders who have been in a similar situation to yours.
Let me start off by saying raising capital isn't an easy task. It will definitely take more time than you expect and it is actually not all about the money. Equally important is from whom that check is coming from, sounds like a given but it is something not enough founders pay attention to. You will be stuck with your investors for quite some time so take your time to look beyond the money on the table.
At the early stages, the most likely place your capital will come from is angel investor. Angel investors are private investors who usually invest between 20 000€ to about 50 000€, getting one onboard isn't as easy as many may think. Angel investors roughly invest in one out of every 40 companies they meet so you will definitely need to put your best foot forward to convince them that your company is one of the 2,5 % they should invest in.
So what should you look for as a first-time founder in your investors?
1. Do you like them?
Your investor will be an important part of your company and you will have regular contact with them, therefore building a personal relationship is essential. Like any good relationship, there needs to be a bit of chemistry and you should both enjoy each others company. This is even more important in the beginning as you will have a ton of questions and often turn to your investors for support or feedback. Sure, they aren’t nor should they be your buddies but there needs to be a deeper connection, a connection that stretches beyond the capital provided by the angel.
Taking an angel investor onboard is the beginning of a very long relationship so take your time. Often your gut feeling will lead you in the right direction so make sure to listen to it.
2. What are their true strengths?
May sound like an obvious one but evaluating your potential investors for their strengths is exactly what you should do. Look at their track record to get a better understanding, talk to their portfolio companies and do your homework to better understand them and what they can contribute with. It is essential because it will also help you understand how you can get the most out of them. As you know, starting your own company is the beginning of a thousand questions, how do we grow? what is reasonable compensation? how should we do product development? and many more. Heading into all of this you will want to be surrounded by people that can offer you a helping hand or can connect you with others who can help you.
Also, think about the mix of investors, how will they function together and do they have complementary skills? It is a smart move to think about your investor as you think about your team and the skill-sets they have. Try to make sure that the investors you have complement each other well.
3. Would they help you out without expecting anything in return?
Test the people you are considering as your first angel investors as early as you can. A good test of their interest in you and your company is to see if they are willing to help out without expecting anything in return. This is usually a good indication of how they function as an individual. Good angel investors are usually very generous with their time and network and eager to help out young founders in any way they can.
The easiest way to test that is to see if they would introduce you to other investors or get you a new sales lead. If they take the time and are eager to help you out you are probably on to a keeper.
4. What is the word on the street?
Take your time and do some exploring, it will be wisely invested time and it can save you a considerable headache later down the road. The easiest way to do this is by contacting other founders at companies the investor previously has invested in. Among founders, there is a tremendous pay it forward culture and they will be quite glad to help out without expecting a lot in return. A free coffee will get you quite far.
When talking to other founders ask about how they have benefited from the investors and how their relationships works as of today. Another interesting aspect is to try to catch how involved the investor has been in the company in general as it will most likely be an indicator of their involvement in your company.
So you seem to have the following things checked off now what?
Once you have discussed your business, the road map ahead and established a clear northern star it is time talk about valuation and to try to agree on a deal.
How your potential investors approach the valuation dialogue is equally interesting and revealing. Don't expect the investor to accept what you offer straight up, expect a negotiation.
One thing you should look out for are investors that are looking to seize a large part of your company early on. A good rule of thumb is that your seed round shouldn't consume more than 20% of your company's equity, everything around 20% or above should be setting the warning lights off. Why? Well, you need to think about dilution going forward. For each round of investment you take in you will most likely be diluted, meaning that you and the rest of your team's ownership is going to decrease for each consecutive round of investment.
Loosing more than 20 % of your company in the first round isn't a good thing since you will most likely lose roughly 20% in your next round (VCs). Investors that are long-term and care about you and the company will want to make sure that the founders of the company aren't diluted to heavily. As a good investor, you want an upside but you also want to make sure that the founders are committed and engaged in making the company a long-term success.
This is a short list of our learnings and if you successfully passed all these steps then congratulations are in order! Now stop reading this and get out there and make your business the success you promised your angel investors. VC are next up and that is a different ball game.
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Illustration Malika Favre