For most tech founders, fundraising is a critical part of building a successful startup. Relying on growth capital from venture capitalists (VCs) and other investors, however, poses significant challenges. With tech businesses springing up everywhere, this process has become all the more competitive. A top VC firm assesses thousands of opportunities per year, which will be whittled down to less than 200 for preliminary due diligence, and then about 20 funded companies. This not only means that tech founders need to be intentional about setting themselves apart from their competitors, but also signifies the imperative of selecting the right investors to accompany them on this stage of their journey.
Today, amid a tech boom, making the right investor choice holds more significance than many founders comprehend. It can be the pivotal factor that propels success or leads to setbacks. This is important to note because identifying potential investors doesn’t only have to be about funding. Apart from capital, there are several ways investors can provide support to your company and plug existing gaps in your cap table. Certain investors can bring in sectoral expertise, large networks of partners, talent, and access to investor communities for follow-on funding. The luckiest founders have even been able to lean on investors for emotional or moral support when necessary.
Below, we delve into some of the best practices for assessing investors as you navigate the ascent of your tech startup.
How can tech startups effectively target well-suited investors?
To start off with, you need to make sure your investment proposition is closely aligned with the target investor’s mandate. The key elements to consider before selecting a prospect are:
- The investor’s industry, business stage and geographical focus. This alignment not only increases your chances of securing funding but also fosters a more productive and strategic partnership.
- Investment philosophy. This encapsulates a fund’s sentiment towards its chosen market, its thoughts on existing problems in this market and opportunities for solutions.
- The investor’s existing portfolio. If they have already backed a company whose solution is in direct competition with yours, outreach may be futile. On the other hand, identifying potential synergies between your startup and an investor’s existing portfolio companies could work in your favour when pitching.
- Deal origination preferences. Some investors strictly consider opportunities that come through their network. In cases like this one, cold outreach may likely turn out to be a waste of time and resources. Unless you can get in contact through a referral, consider other investors instead.
A founder should also consider a broader assessment of the sources of funding which are aligned with their company’s vision. While VCs and angels tend to be the default options, alternative sources of funding, like non-dilutive capital from governments or development agencies, as well as funding from foundations or family offices, also exist.
How many investors should a tech startup plan to target for a round?
Casting as wide a net as possible will increase your chances of securing funding, but there’s also evidence to suggest that targeting over 100 qualified investors will not have any measurable impact on boosting your fundraising efforts. While you should definitely cap your list at 100, reach out to at least 60 investors.
A good rule of thumb is to group your investors and target one group at a time for outreach. This will help you effectively manage your pipeline, including meetings, follow-ups and other communication with interested prospects.
Using a tiered outreach method also helps you iterate and work your way up to the most compelling pitch for investors. You could take this one step further and use a “reverse investor list” strategy. This approach allows founders to split their targets into batches which are sorted according to the likelihood of conversion and how much you want them on your cap table. Once you initiate outreach, start with the group of least likely prospects, and work your way up to your dream investors. On the way, and using feedback from the lower priority investors, you can continue to tweak your presentation until you get it just right.
Leverage The FutureList for investor prospecting
The FutureList is more than just a list — it’s a research tool and a resource that showcases and connects innovative technology companies, investors and talent around the globe.
Powered by big data and analytics, the platform provides curated solutions for every tech founder’s outreach. You can access the database of investors for free and filter your search to narrow down prospects whose focus and philosophy are aligned with your company’s. Once you have a shortlist, you can dig deeper and look at each investor’s portfolio companies. While you may not have the details of these companies, reaching out to other founders who have worked with the investor can provide invaluable insights. This is an often-overlooked strategy that can reveal a lot about the investor’s style and approach.
Initiate first contact with investors
Always start by clinching the easy wins. Do you have existing investors you can approach about follow-on funding? These are people with whom you have a pre-existing relationship and who are already sold on your business. If they can’t provide follow-on funding, explore other ways in which they may be able to help, like referrals and warm intros.
Next, go back to the list of target investors you compiled. You can circulate this list between a few trusted individuals in your network, in case they can point out a few strong prospects you might have missed or arrange intros to any of the investors in your list. LinkedIn is a great tool to check whether you have any connections who work at the firms you are targeting. While it’s not a good idea to pitch an investor via LinkedIn, it’s a great place to start establishing rapport with contacts, before moving the conversation to a more appropriate channel. If you don’t have any direct connections, consider asking a close, mutual connection to arrange the intro on your behalf.
Finally, make sure your outreach is personalised for every single investor you reach out to. This makes it easy for both you and mutual connections to sell your company to an investor. Focus on what you know about the investor’s background and recent activities and why your company would be a great fit for their portfolio.
Parting words to tech founders embarking on a fundraise
Fundraising is a marathon, not a sprint. The entire process, from initiating outreach to closing the round can take several months. Start early enough that you have adequate runway to keep you afloat during this time. Develop long term investor relations strategies, instead of pursuing isolated, one-time interactions. You will often need to build trust and credibility with potential investors over time. In reality this can look like sending updates on key developments and traction periodically before the investor is convinced to back your startup. Be proactive and identify multiple touch points to keep you on an investor’s radar. This can include reaching out to congratulate them on positive developments or interacting with their posts and published content to demonstrate your own expertise.
Even in a bear market, it is entirely possible to successfully raise capital. It is a science as much as it is an art. Developing the right strategies, being receptive to feedback, and actioning these insights to perfect your pitch will pay off in the long run.
The ROOM is building a community for the world’s most exceptional problem-solvers. Visit theroom.com to unlock opportunities that will transform your career and support you in reaching your dream goals.
This article was adapted from “Finding the Right Investors for Your Startup”, originally published by Tigele Nlebesi of The FutureList Team.
