Not long ago, raising money from angel or institutional investors was the exception, not the rule. Today, it's become a badge of honor to talk about the amount of money that a startup has raised -- to the point where fundraising has become a primary focus for many founders. This often comes at the expense of critical and basic activities like customer service, profitable revenue generation, or employee training and growth.
President Obama's new startup initiative, cleverly titled The JOBS (Jumpstart Our Business Startups) Act, is aimed at boosting the entrepreneurial ecosystem by making startup investing easier. The concern that I have is that in the process it may push too many founders to either seek capital prematurely, or to take money from all comers.
If you are out there looking to raise money, or are considering crowdfunding your startup, here are some things to keep in mind about prospective investors (whether angel or VC).
Valuation Is a Starting Point
Startup founders obsess over their company's valuation. However, there are many things in even standard investor agreements that ought to take at least the same, if not greater importance. Understanding the equity type that a particular investor requires (e.g. preferred, participating preferred, common voting or non-voting stock); looking out for provisions such as anti-dilution protections; requirements over board composition and participation; veto rights over future deals -- all these matters play an equally critical role in the future equity returns of the business as valuation does.
Understand the Investor's Philosophy
Every investor has a different expectation and philosophy when it comes to their investments. Some expect a quick return, others have a set-and-forget approach. Some angel investors or VC's require extremely active participation in a company's day-to-day affairs and daily or weekly updates from CEOs, others less so. Some require monthly audited financial statements, others are OK with the odd email updating them on how the company is performing. Risk tolerance and loss tolerance also vary tremendously from investor to investor. Understanding their expectations clearly before the investment documents are signed is paramount.
Know the Investor's Experience
Investors who do not have startup experience and are not active in the space can end up as painful and unnecessary distractions. The road to financial return from a startup is long, often treacherous and requires lots and lots of patience. If an investor's primary experience is in the public stock markets, they are in for a surprise, and you as the founder may be in for a long and painful marriage. Sometimes it's better to say no to an investor if they do not fully understand what they're in for by investing in a new, unproven venture.
The Network May Be as Important as the Cheque
Whereas there is benefit to raising money from people who will invest and keep a hands off approach, there is even greater benefit to taking money from investors who either actively invest in complementary companies and industries, or who are entrepreneurs themselves. Often, key introductions and mentoring is as important to a young startup as money. An investor who comes with a network of prospective partners and customers; experienced recruitment candidates to bolster management ranks; or a rolodex with other investors' names, is invaluable. Likewise, someone who can act as a mentor to assist a new founder with the invariable twists and turns of a startup is worth their weight in gold.