How to seek and understand investors for new startup busines

The Investor’s Viewpoint on Startups Seeking Seed Funding

February 11, 2010

I drove past a billboard for Charles Schwab on the expressway this week, “First rule of investing. Investors rule”. As I talked with 10 or more start-up companies over the week, I thought how many founders should note this perspective. I would venture to guess that every founder I spoke with would agree with this statement when it relates to their own stock portfolio. Your personal portfolio may have Waste Management, Apple, and Coca-Cola in it. As long as the stock prices are rising, you’re happy. But what if the stock prices are heading downward or holding at the same level for seemingly forever, what do you do? Do you continue to keep them as the price is heading south, do you buy more on weakness believing that it will shoot upwards in the future, do you sell and move your money into what something more promising? If I asked the same question to the founders about whether it holds true for angel investors or venture capitalists, they would hesitate to answer, somewhat unsure of the startup investor’s perspective.

There are thousands of stocks to choose from on the publicly traded exchanges, and there are thousands of start-up proposals to choose from for angels and venture capitalists. If you manage to convince them to invest at conception, how long will they stay invested and will they invest more in the later stages? Just like the founder who controls his own portfolio, startup investors rule and will more than likely control the startup. And just like the founder and his portfolio, startup investors will watch the progress of the startup and will have to face choices in the future about letting the startup continue operating, selling the startup, or liquidating it for the value of its assets.

Of the 10 startups I spoke with this week, all were looking for seed capital; all had spent a year or two developing their first prototypes in isolation from the investor and in some case, even from the potential customers. There are inventors and they are ready to emerge from their isolations to seek capital. All used the same words to me, “we are looking to network with angels and venture capitalists, to become connected into the investment community”. Startup investing is a high touch, personal business. It is also highly competitive. There is a lot of competition for the startup capital, which is in short supply these days. Waiting is a big mistake founders make. This is a B2B sales process. Finding the relationship to build takes time, and cultivating the relationship takes time. It’s not something that happens over night.

A venture capitalist told me a trick to starting the relationship. Find a meeting where the venture capitalists are presenting, introduce yourself to the venture capitalist after the talk, ask or comment on the talk, exchange cards, and you’ll be amazed at how this simple act forges a personal bond and the venture capitalist will be much more willing to hear what you have to say about your proposal at a later date.

A second mistake is not knowing the investment community’s current perspective. What type of companies are they willing to invest in today? What criteria they are using to judge these start-ups? The answers change every year. While no two investors are alike, they tend to coalesce around some common preferences. Entrepreneurs won’t know what’s going on in the investment community if the isolate themselves during the lengthy development product. Projects that were funded 10 years ago would not be funded today, and projects funded today would not have been funded 10 years ago – not because of the underlying technology but simply the business model.

Recently I’ve heard investors banter about how everything is free. Many expect any loans made to the startup or back wages recordedby the founders to be forgiven when the company gets investors. It is not uncommon for investors to ask founders to continue to work for free for another two years. I’ve also seen venture capitalists ask to recaitalize a startup, making any previous investment almost worthless, in order to invest in a technology startup that has spent three or more years developing a product, has initial customers, and is at the stage of wanting to scale their marketing and sales. It’s an investors’ market and they can demand alot of a startup looking for new business funding these days.

A final mistake many entrepreneurs make is to believe the only path is to raise funding from angel investors and venture capitalists. If these sources of funding didn’t exist, what would be your best alternative for building your company without them?