Early Advice 2: Finding the Right Investors

Finding the right investors for your startup sounds like almost tautologically pointless advice. After all, who goes out there looking for the wrong investors?

It turns out, a lot of people.

When I began looking for potential seed investors in Modulate, I had a checklist of three items.

  1. Do they like (or at least have a history of) investing in Boston-based companies?
  2. Are they interested in companies building ML or working on gaming or audio?
  3. Do they typically invest in the size of round that we are looking to raise?

If a VC, angel, or other organization met these three requirements, I’d tell myself they were a good fit.

The problem is that these criteria are all surface level, and ignored many significant differences between the ways investors prioritize investments; engage with their portfolio companies; and cultivate expertise and connections which can be helpful to their portfolio orgs. The initial three serve as a minimum bar, but not everyone who cleared that minimum bar was actually a good fit!

As I continued to explore potential seed investors, I developed a deeper level of categorization – separating investors based on the mentality they brought to investing, and the ways in which that impacted the value they’d deliver to us, beyond simply the monetary investment. Of course, I’m not claiming that any single investor is perfectly captured by any one of these categories – but I do think they’re helpful heuristics to think about how you’re pitching and what kinds of investors you’re looking for.

The Shark

Modus Operandi: Focuses on profits first, everything else second. Often doing strategic investing for an existing organization.

Location: Usually leading strategic funds of major corporations, or else in certain VC organizations. The very best VCs tend to value reputation more strongly and so typically end up as the Guiding Force instead.

How to Pitch: Understand their specific goals as a firm and as an investor in monetary or company-political terms, and frame how your startup can benefit that mission. Emphasize your competitive moat and the ways in which you’ve mitigated uncertainty regarding the market opportunity.

Hidden Traps: If you get a term sheet, be wary for hidden terms that find ways to bring more money to these investors than they’ve earned. In the pitch itself, be extremely wary of sharing too much detail, especially on the technical side – these sorts of investors are known for accepting pitches only to learn enough about a product to build it themselves.

Check Size: Mid to Large

The Auditor

Modus Operandi: Unlike the shark, the auditor does value their relationship with you, and will probably be somewhat less cutthroat. But they’re still investing with the goal of making a stable income, and so will be extremely meticulous in investigating the details of your business plan. If you have no profits yet, they probably will consider your business too risky, regardless of upside.

Location: Institutional angel groups, especially on the East Coast

How to Pitch: Make sure you’ve got real, demonstrable evidence of your market opportunity and traction. Focus on ways to monetize in the short term and get your investors their money back quickly.

Hidden Traps: The Auditor typically has good intentions, but can burn a great deal of the entrepreneur’s time investigating minutiae of a business that’s still very early and full of uncertainty. Make sure not to over-invest your time in these conversations.

Check Size: Small to Mid

The Cowboy

Modus Operandi: An investor with a passion. These investors seek out businesses with enormous potential upside, both from a dollar perspective but also simply as businesses that personally excite that investor. They are far more willing to jump in early so long as they believe in the vision – but if you don’t sell them on the vision, no amount of financials or pilots is likely to get them on board.

Location: Early-stage VC funds on both coasts

How to Pitch: It’s all about your passion and your mission. Make them feel in their bones how exciting what you’re building is, and the ways it could change the world. Make sure you can ground the vision in short-term costs and strategies, but always bring it back to the full scope of what could be.

Hidden Traps: There’s a sweet spot here. There’s a difference between vision-driven and pie-in-the-sky, making stuff up – be sure you can solidly articulate why you’re the ones to achieve your vision if pressed! In addition, make sure you understand the role and authority of the cowboy within their overall firm – you’re likely to get signals from them as an individual that imply that you’re closer to getting the firm fully on board than you necessarily are.

Check Size: Any Size

The Old Money

Modus Operandi: Someone who made a lot of money as an early employee at one of the major tech firms. They tend to be followers who will spend a lot of time chatting with their friends about your idea – which means if you get them, you get them all, but if one of them loses interest, that probably dissuades the rest as well. They probably can get you connected to almost anyone in the world, but their relationships are surface-level – they’ll get you in the room but won’t buy you much goodwill beyond that.

Location: VC firms, primarily on the West Coast

How to Pitch: Focus on clearly differentiating what exactly is unique about your business, and erasing any misconceptions. They’ll vet the business opportunity and market interest with their buddies later – your biggest priority is making sure that the game of telephone doesn’t distort your message, so make sure to leave them with a clear impression of what you’re doing and why it’s so exciting.

Hidden Traps: The Old Money investors all are best friends with each other. Make sure if you’re speaking to multiple of them, your story is clear and consistent. If something changes in the business, update everyone. Otherwise, these sorts of discrepancies will raise a huge red flag.

Check Size: Large

The Angel

Modus Operandi: An investor who is putting money in primarily because they believe in the founders and want to see them succeed. As individuals, Angels tend to value quality relationships, so while they may not have the range of the Old Money, they generally buy you a lot of goodwill with their associates simply through their endorsement.

Location: Usually individuals – walk your network or talk to those in the industry to find the best names in your area.

How to Pitch: Focus on your story and how it led you to the current vision. Be humble and engage them in a conversation about the vision rather than asserting everything – this helps them feel appreciated and often uncovers valuable advice.

Hidden Traps: Make sure the angel understands your timeline and what’s going to happen to their money. These investors will be extremely supportive early on but are the first to struggle if things take a bad turn.

Check Size: Small to Mid

The Founder+

Modus Operandi: Similar to the Angel, except the Founder+ was once an entrepreneur themselves (they may even still be.) They are investing based on ideas and belief in the founders, because they remember themselves in that same position. They can be some of the best endorsements for you – as other investors will trust in their previous success – but will often be the busiest and hardest to pin down for significant feedback or mentorship.

Location: They are or were founders of successful startups – the best ones will be those in your area, both in terms of market focus and geography.

How to Pitch: Focus on your mission and your background. The Founder+ have nobody to answer to, so as long as they trust from their interactions that you’re a smart and responsible founder, they’ll often feel less inclined to dive too deep into the specifics of the business plan.

Hidden Traps: Mentioned above, these investors tend to be extremely busy with their own projects – investing is more of a hobby for them, and while they’ll generally earnestly want to help you, you’ll have trouble getting regular, significant feedback from them.

Check Size: Any Size

The Guiding Force

Modus Operandi: Investors with strong beliefs about the right way for your business to develop. They can be extremely resourceful and supportive, but you’ll need to make sure you develop a good relationship, as otherwise you risk them wresting control from you, whether legally or simply in practice, or drowning you with advice and requests for updates.

Location: Larger VC firms, primarily on the West Coast

How to Pitch: Show them the merit of the idea, and of your ability as a founder to handle the tough questions. The specifics of the execution will be important, but you can handle this as a conversation, rather than an explanation – but first you have to get them thinking about how they’d make this company succeed themselves.

Hidden Traps: These investors are the most work to keep happy once you’ve gotten your money. Depending on your experience and circle of mentors, it may be worth it to have these investors in your corner, but if you’re looking to “ask forgiveness, not permission”, you may find your relationship with these investors suffers.

Check Size: Large

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