Question of the month: How should a startup choose its investors?

Do your own due diligence

For startups, it pays to be selective when securing funding. In the early-stages of the startup journey, raising money is crucial. While it is commonly known that venture capitalists conduct extensive due diligence to make sure they invest in the best incumbent companies, founders frequently overlook the fact that they should also be conducting their own due diligence.

Research your options:

Choosing the right investors is crucial if you want to set yourself up for success. You are choosing them just as much as they are choosing you.

Corporate ventures, venture capital firms, and angel investors are the three primary sources of startup funding.

• Corporate venture capital (CVC) is the investment of corporate funds directly in external startup companies. Investments are usually targeting innovative or specialist firms in order to gain a specific competitive advantage. Most CVC funds can be considered as a strategic investor. 
• Venture capitalists typically aim for higher risk-reward ratios and are attractive for new companies with limited operating history, that cannot raise capital in the public markets. These funds invest in exchange for an ownership stake, and provide support with industry expertise and market connections. If you show high upside potential, this may be your best option.
• Angel Investors are private individuals with a strong passion for entrepreneurship and may wish to take a more active role in the operations of your company. They, like venture capitalists, will provide assistance and business expertise on a smaller scale, and thus usually receive a smaller ownership stake.

Assess green flags: Do the investor’s expertise and goals align with you?

Alignment: Do you share the same vision of the market? Do you see yourself spending most of your time working with them?

Track record: Have they backed other successful companies in a similar industry?

A platform to help you grow: What is the percentage of their portfolio that gets follow-on financing ?