Getting in front of the right investors is a crucial step in preparing for a capital raise, but this is where most entrepreneurs tend to spend the least amount of time. Once they have marketing materials in-hand, many entrepreneurs hit the ground running, taking any meetings they can get with investors.
This haphazard approach is a mistake and a waste of time. This post will walk you through a smarter approach to identifying the right investors.
Create a Target Investor Profile
It’s a waste of time to talk with investors who will never invest in your company. To prevent setting up meetings with these investors, first scope out your mandatory investor characteristics. Here are the primary ones:
- Transaction type – Does the investor invest in the kind of transaction you want to pursue (growth capital, buyout, debt, etc.)
- Capital type – Does the investor invest with the type of capital you are looking for (equity, debt, etc.)
- Company stage – Does the investor invest in your stage of business?
- Investment size – Does the investor invest the size check you need?
- Industry focus – Does the investor focus on your industry?
- Location – Do they invest in your geographical region?
- Hold periods – Does the investor’s investment hold strategy align with your interests?
- Management strategy – Does the investor’s management style align with your interests?
- Strategic opportunity – Does the investor offer more than just cash?
- The right person – Determine which people at the firm are the most logical investors for your business.
Create a target list
With your target investor profile identified, build a target investor list.
- Start with firms that have actively pursued you in the past. Investors that already know you and have expressed interest in your business are the easiest investors to get in front of.
- Add in firms that you’ve had conversations with in the past, but haven’t actively pursued you.
- Ask your trusted advisors and fellow-entrepreneurs for recommendations on potential investors that fit your desired transaction type. Asking contacts who spend a lot of time in the capital space (bankers, lawyers, accountants, etc.) is a great way to find connections.
- Ask investors you know who you should reach out to. Investors often share deal flow with upstream and downstream firms and are usually happy to pass along exciting opportunities.
- Research local investors in your area. Most major cities have some investor list or directory or google searches can turn up options. (here’s one of Nashville’s investor lists)
- Research investors that specialize in your industry. There are so many websites now that track investors who are interested in specific sectors. Google your industry and “investors,” and you’ll probably find one of these lists.
Evaluate each firm against your target criteria and classify them into four buckets:
- Ideal targets: These are the investors that on paper check all your boxes.
- Potential targets: These are investors that check most of your boxes and invest in the type of transaction you want to pursue. Your ideal investors may not be interested, and in that case, you always want to have a list of acceptable alternatives.
- Future targets: These are investors who you are likely too early for. Occasionally these investors will be willing to invest in an earlier-stage company than they typically do because it’s in a sector they are excited about, and they want a seat at the table for later transactions. It’s also good to get in front of these folks early-on so that when you are the right size, they already know who you are.
- Not a fit: Don’t bother doing any more work on these investors. Delete and move on.