What Should Founders Look For in an Investor?

There’s a lot of pressure on founders to pick the right investors. We often discuss the traits investors look for in founders, but we approach the question the other way around far less frequently. Nonetheless, it’s important for founders to be selective about the investors they choose to work with. The top venture capitalists can fuel your startup toward success — but the wrong investor can just as easily spell disaster. It’s not a decision to take lightly. 

To complicate things further, it’s extremely difficult to terminate a deal with an investor once it’s been struck. If you want to avoid this ugly situation, you need to approach the VC vetting process with care and diligence.

It’s best to begin by narrowing the field down to a list of target investors that seem like viable candidates. At this point, you should be doing higher-level research, like finding out whether a potential target investor is currently funding any direct competitors of yours or whether they’re even interested in funding startups in your industry. You should also begin seeking introductions with the investors that make your list.

But once you’ve chosen the investors you want to prioritize and put yourself on their radar, the next hurdle is evaluating each candidate in more detail. This is when you take a closer look at each investor’s personal and professional traits and decide which would be the best fit for your company. Let’s explore some of the characteristics you should analyze when you’re evaluating your options.

1. Experience

An investor’s past can tell you a lot about what they’ll be like to work with. There are three main areas of experience to consider.

Entrepreneurial Experience 

Some past research suggests the best investors have entrepreneurial experience of their own. However, there are many exceptions to this, as you can find plenty of examples of successful, high-profile investors who have no experience as entrepreneurs. It’s best to consider entrepreneurial experience a nice-to-have, not a necessity. 

Industry Experience

Industry experience, on the other hand, is more important. At the least, you need someone with enough general business sense to “get” what you’re doing with your company — not just your big-picture idea, but all the tough decisions and technical details about your business strategy. 

Industry experience isn’t necessarily a requirement, but an investor who’s already familiar with your industry is usually much easier to work with than one who’s clueless about the inner workings of your company.

Investment Experience

What do your potential investors’ existing investment portfolios look like? Do they have a positive track record of investments in your industry? If they’ve backed multiple successful ventures similar to yours, they probably have knowledge and contacts to bring to the table in addition to money.

2. Open-mindedness 

People who are curious about new ideas and open to fresh perspectives make the best investors. It’s this natural curiosity that drives many VCs to put their money toward young, innovative ventures in the first place. You want an investor in your corner who embraces forward thinking and is excited to help you fuel progress. A healthy amount of constructive criticism is not only helpful — it’s essential. But this criticism should be inspired by the VC’s passion for improving your idea, not by their doubt in your creative vision.

3. Relevant Connections

An investor's contacts are sometimes just as valuable as their capital. However, be wary of VCs who talk up their network in vague terms during the courting process and don’t follow through with specific, high-quality connections after the deal has been signed.

You can also use the size and relevance of the investor’s network to gauge their credibility. A long list of connections to successful, influential people in your industry speaks for itself. You should also choose an investor with a good reputation among other investors because once that investor signs on, others will be more inclined to follow suit in subsequent rounds.

4. Advocacy 

Is the investor going to be on your side through thick and thin or are they just looking for an easy payout in a hot market? The best investors serve as valuable business partners who actually have a passion for the industry and an interest in your company’s future. Avoid investors who seem likely to cut and run as soon as the going gets rough. If they aren’t willing to bet on your long-term success, they’re usually not worth bringing aboard. 

Try to find an appropriate balance between a truly unsupportive VC and one who wants to micromanage everything. Finding out how many other investments the VC has made recently can give you some idea of how much time and attention they’ll have available for your company. It also depends heavily on the investor’s personal style, which you can learn about through observation, or better yet, by asking other founders.

5. Character

Uncover everything you can about an investor’s reputation before you commit to working with them. One of the best ways to do this is to simply ask around. Reach out to other founders in your network who have partnered with or spent significant time around the investor and get their firsthand perspectives. Due diligence now can absolutely save you from headaches down the road or even from outright failure. Building a startup is hard enough work without having to deal with an unprofessional or unreliable investor.

Stay far away from investors who aren’t respectful of your time and the time of other investors in the funding round. You might come across VCs who “play games” by dragging on negotiations only to drop out at the last second. It’s wise to ask other founders who’ve worked with the investor about how they were treated before you reach this point.

6. Personal Compatibility 

Aside from objectively good or bad character traits like respect, you should also consider whether a potential investor’s personality is a good match for your company. For example, if you have vastly different communication styles, it could be challenging to work together. 

Each investor you choose to pursue should also have an investment philosophy that aligns with your team’s priorities. It’s important the VC you work with shares a similar vision for your company (especially if they’re more of a hands-on investor). 

Important Questions To Ask Investors

You can learn quite a bit about an investor from the people they’ve worked with, but sometimes the best way to find out more is simply to ask them. When you meet with a potential investor, here are a few questions you should have at the ready to help you evaluate the traits listed above:

• What sets you apart from other investors?
• What’s your investment thesis?
• What industries do you typically invest in?
• How many investments have you made in the last six months?
• What’s the best investment you’ve ever made and why?
• What’s one particularly difficult or valuable lesson you’ve learned as an investor?
• What qualities do you look for in a founder?
• What do you expect from the founders you work with?
• Besides providing funding, can you name an example of a way you’ve supported a company in your portfolio?

The Role of Mentorship

The best way for founders to start evaluating investors is with advice from other founders. Before you get too deep into your investigative process, find out everything you can directly from the people who have worked with the VCs you’re considering. Even if you don’t know anyone who’s worked with the specific investor you’re evaluating, mentorship from a fellow founder or even from an experienced VC can help you navigate the decision. 

Mentorcam can connect you with a mentor who will support you and show you how to identify the best investors for your startup. Get in touch today and set up a one-on-one meeting with a mentor who knows what it’s like to stand in your shoes and what you need to do to succeed.