Gaining investment can inject vital capital into your business. As well as money, the right investor can bring expertise and a roller deck of useful contacts. However, with investment also comes equity, so finding the right investor is vital. You don’t want the wrong fit having a stake in your business.
We’re sharing some insights into finding and approaching the best investors for your company, with tips and advice from Jonathan Lerner, Partner at Smedvig Capital.
Knowing what type of investor you need
Before approaching an investor, it’s best to know what kind of investor would work for your business.
Ask yourself the following questions:
How involved would you like your investor to be? Explore their previous investments and how present they appear to be with other companies. Do they seem very present in events and press coverage? When taking on an investor you need to remember that they will have a stake in your company, so you need to be willing and able to relinquish some control.
What is their expertise in your type of business and industry? To see the benefit of their contacts and expertise, working with investors who know your industry is incredibly beneficial. If you’re doing something different, then look for investors that invest in business mavericks. They’re much more likely to be excited in funding something new and innovative if they’ve got a history of doing this.
What does their portfolio look like? Jonathan Lerner says founders need to think about where investors can draw learnings from based on what they’ve done before. He suggests considering the “broader portfolio” and establishing “who you’d be able to learn a lot from”. Start seeing an investor as a way of broadening your network, and finding potential new clients and suppliers for your business.
Do they have the money now? Don’t always assume that an investor has money to spend all the time. Perhaps they’ve had some investments that haven’t worked out recently and are cash poor. Try and establish when the last time they made an investment was, and look for patterns of investments slowing down. Don’t waste time hunting down investments from teams that don’t have the capital. Jonathan Lerner suggests you should really take time to understand where an investor is financially. He continues, “are they just going to be able to fund that first round, or can they fund your next round, is this a small/big cheque for them?”
Additionally, Jonathan emphasises it is vital to have an idea if this investor will be looking to do multiple rounds and what their expectation would be in terms of exit.
Where to find the right investors
Once you know what you’re looking for in an investor the next challenge is of course finding an investor that matches your needs.
Using your networks can be vital here. Seek advice from others in your industry or at similar stages who have sought investment. Understand the pros and cons of who they decided to work with, and those they decided to reject.
To gain a balanced view, spend time to gain the broadest possible insight into investments.
If your network isn’t particularly wide and you have some investors in mind, reach out to organisations they have invested in previously. Don’t be afraid to message people on LinkedIn asking them for a chat. Virtual or real-life coffees with other founders can be a fantastic way of picking someone's brain.
Resources to help you find an investor
The UK Business Angels Association has a directory of organisations that offer early-stage investment and support. You have to subscribe to their mailing list in order to access the list.
The Angel Investment Network helps matchmake founders and investors. You can search by area of enterprise to help you find a match that fits your criteria.
The Entrepreneurs Handbook has a list of venture capitalist firms in London and the UK.
London Demo Day is a fantastic way for London’s student entrepreneurs at UCL, King’s, and Imperial to network. Startups will have the opportunity to pitch to leading investors, partners, and alumnae.
Tech Crunch has created a list of the 10 venture capitalists that founders love the most.
Startups.co.uk has created a list of investors to follow on Twitter. This is a fantastic way of learning more about investors as a whole but also seeing what investors may be a good fit for your business by seeing what they share on social media.
Approaching an investor
Now you’ve laid the groundwork, you’ll hopefully have a shortlist of investors to approach. Jonathan Lerner recommends, “don't set yourself a plan that is too aggressive! And most importantly, don't let the business performance tail off because you've got your head in fundraising and are neglecting the business.”
He continues, “do try to really quickly get to whether that investor is interested or not. Find out all their questions and concerns as soon as possible.”
Different investors have different application processes but where possible try and establish a personal relationship early on. Attend any events and conferences that the investors may be hosting or sponsoring or ask for an introduction from someone in your network. Open the conversation by asking for advice and detail about their application process, and whether your business is potentially of interest.
Be patient with this process. Jonathan says that a common mistake founders make is underestimating how long this process can take. “There's a real cult in entrepreneurism, it's all about the headline, the unicorn, the great story you've heard and that skews reality quite a lot. Some fantastic companies have taken a long time to raise. If you have great materials, you're realistic about what you're going for and allow yourself a good amount of time to do it all you're on the right track.”
Jonathan advises, “a frequent mistake I see is people overegging the expectations of the round size and therefore the valuation - and falling flat on their face. That's not to say you shouldn't go for the biggest raise that you can, but you need to let the process run organically, get the interest first and then ramp it upwards rather than going out there with a very big bold aspiration.” Preparedness and patience are vital during the fundraising process.
Red flags to look out for
Jonathan suggests there are two major red flags when looking for an investor.
“1. Arrogance - an investor thinking that they know more about your business than you do.
When you’re having initial conversations make sure you have personal chemistry. Can you see yourself facing each other every month around the board table? Will this relationship manage through the good times and bad?
Jonathan reminds us that, “startups are a roller coaster and there will be some tougher times even if you haven’t got to them yet. You need to have someone you can trust. That is the bottom line.”
These initial conversations and early negotiations help forge the basis of the relationship moving forward. If it doesn’t feel right at this early stage it is better to not pursue it any further.
Approaching investors can be a slow process. But, if you do your research and know what you’re looking for from the beginning you can save yourself a lot of hard work and time. Whatever happens, no investor is better than an ill-fitting one, so make sure you take the time to find the best investor for you!