There's a common joke in the startup world that an investor in a company can be tied to the entrepreneur through the investment longer than the average marriage, and it's true. Investments between an entrepreneur and an investor can last for over 10 years (the average length of a marriage that ends in divorce is 8 years). That's why investors want to perform extensive diligence before making an investment and parting with their hard-earned money.
As an entrepreneur eager for investment, it may seem like the investors have all the power. However, determining investor/entrepreneur fit is a two-way street. Before you accept money from investors in your business, you must do your homework on investors too. Make sure to research the following questions to see if you're aligned before pitching them for their money.
1. How involved do they like to be with their portfolio companies?
Investors are often active or passive in their involvement. It's important for you to know if they like to help their portfolio companies, if you can ask them for advice and help, and how often you can contact them. You can also find out what they've done to help their portfolio companies in the past, how often they expect to get updates, and what information they expect post-investment. Knowing the investor's preferred level of involvement is key to prevent frustrations from either side being involved too much or too little.
2. Do they invest in specific industries?
Investors may prefer to invest in specific industries, perhaps because it is similar to their background and/or because it is of personal interest to them. Entrepreneurs need to know in advance whether the investor invests in their industry. If not, it could be a waste of the entrepreneur's time to pitch them. If the investor does have depth of knowledge in the industry, it's important for the entrepreneur to know whether the investor could be in a position to offer strategic introductions and helpful advice.
3. Do they invest in a certain geographic areas?
Some investors invest anywhere in the world, while others may prefer to invest locally. Investors often make helpful introductions to their portfolio companies, and they may not invest in your area if they don't feel they have a network of contacts nearby that would be beneficial. If an investor doesn't invest in the area where you're based, it may not be worth your time to contact them.
4. What is their typical check size?
Individual investors often have a typical amount they invest in a company (e.g. $25k, $100k, $500k). Being familiar with this amount in advance is key. You need to understand how their preferred check size fits in with what you may be seeking for your raise. Knowing whether their investment size is smaller or larger than what you're seeking will help you understand whether it's worth the effort to pursue the amount and if you need to include other investors in your round.
5. What is their preferred valuation range for investment?
Investors often have a valuation focus (e.g. companies valued at $2-5 million, $5-10 million, etc.). It's important to know in advance whether your company's valuation is consistent with the range in which they invest. You may be too early or too late for their interest. Knowing in advance whether your valuation fits their focus will help you determine whether it makes sense to pursue their investment.
Savvy entrepreneurs should make their best effort to conduct research on the above areas via publicly available information even before they contact the potential investor. All too often, entrepreneurs will mistakenly contact an investor just because he/she has a recognizable name only to find out that the investor doesn't even invest in their industry or geography.
By doing your homework in advance and being prepared with thoughtful questions, you'll increase the potential for investor/entrepreneur fit both for your short term financial needs but also for your long term strategic ones. You may want to start a tracking sheet where you map out investor names and fill in information on the above areas as you research them. It is a two-way street, and it's up to the entrepreneur as much as the investor to assess the fit before 'marriage'!