In most cases, when building a startup, whether you like it or not, you will have to raise outside capital to get yourself a runway. There are of course companies that do not raise capital or bootstrap, and while it is recommended, it is not feasible for most companies looking to invest in growth. Once you have decided that it is time to raise that capital, the worst part is the worst possible way to accept the first check offered to you without doing your research.
Here are five steps before you contact an investor for your startup:
Narrow down your search for stage and space.
This is a critical step that so many entrepreneurs don’t understand. Not every investor is right for every company. Some investors have an appetite for early-stage companies; others avoid them because of the high risk involved. Some investors avoid certain industries and will never invest no matter how big the company is.
As a business owner, your job is to have a target list of investors who are relevant to you because if you reach out to the wrong investor, you will look bad and waste everyone’s time.
Study this investor’s portfolio, mostly for competitors.
Once you have narrowed your search and have a list of relevant investors, you want to make sure that the investor you are targeting is not already investing in a competitor. The last thing you want is to send your confidential investor deck to someone who can give it to your greatest competitor.
Additionally, the chances that an investor will put capital into two companies that are direct competitors are slim and it is your job to do that research and not advertise that investor.
Talk to entrepreneurs who were raised by this investor.
This could be the most important step of all. With an investor in mind, talk to CEOs who have raised money from that investor in the past. Some of the questions you should ask are “Is the investor business friendly?” “Is the investor offering value beyond a check?” “When things get tough, does this investor step in or does he give up?”
It is a very big mistake to take money from someone who is making your life harder. Being an entrepreneur is hard enough. The last thing you want is an investor making it harder.
Research the investor through their social channels and search engines.
If the investor you are thinking of passed all of the above tests, now is the time to do more research. Now you don’t have to be okay with everything the investor tweets about, but it is recommended that you read what they post there just to make sure there is a cultural match. Remember, this person is not just an investor, they will be a partner for your startup’s entire journey, you will want to get along.
Find your mutual friends and ask for a warm introduction.
After you’ve done all of this research and decided on an investor to target, don’t send a cold email but find someone who knows them and is willing to offer a warm intro and maybe even a good word to insert.
That sounds like an obvious point, but any investor will tell you that they get endless cold pitches every day and most of the pitches that end with a meeting or even an investment come from warm intros created by trusted people.
We all read about these mega investment rounds and glorify raising capital. Not enough attention is paid to the process of raising capital by the right person at the right time.
The opinions expressed by Inc.com columnists here are their own, not those of Inc.com.
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