There are 2 approaches to fundraising:

• Spray and pray – Send your deck to any one you can and hope something sticks
• Intentional – Choosing the right people you want and going out to get them

Which do you think is best?

On one hand, everybody is saying that it’s a numbers game, that you have to hear a lot of no’s until you get to the one yes. Which indicate that the spray and pray method the right choice.

But this is wrong on so many levels…

Why S&P is wrong

Working in the Spray and Pray method is like going to a bar and asking everyone you meet to go on a date. You might hit one that’s going to say yes, but is that the kind of person you want to be with?

Furthermore, you are in for plenty of ups and down. You want the right people with you to give you the right advice and support. If you bring in the wrong investor in you can find yourself having to battle not only the market, but also your board. And that’s someone who can kick you out of your own startup.

The last nail in the coffin is your time and energy. Taking on pointless meetings with irrelevant investors, just because they said yes is a bad idea and a recipe for a lot of frustration for so many reasons.

I think it’s safe to say that you have to be a lot more intentional in the investor vetting process. So, what criteria should you use?

How to Narrow Your List

To narrow your initial investors list you need to know how to filter it. Here are the criteria I recommend you use:

• Stage
  Only target investors who invest in your type of round. Earlier rounds have higher risk and not all investors are open to it. Going after an investor that’s not investing in your stage is simply a waste of time.   
• Industry
  Most investors are industry agnostic, which means they only invest in specific industries. The reason for this is the added value they can bring and their ability to gauge the risk associated with investing at that industry. They simply know the industry therefore are more open to taking risk in it. 
• Geography
  Most investors like to be close to their investments (this is changing with the globalization, competition and teleconferencing capabilities like zoom) which means they only invest in specific geographic location. Another reason for this can be the legal and corporate structure and market familiarity. Regardless of the reason, just make sure you approach investors that are open to investing in your geography.
• Competition
  Most investors don’t have the luxury of making multiple bets in a single race (solving the same problem). This means that if an investor had already made an investment in your direct competitor, odds are that he (or she) will not make another investment in you. So, check for their portfolio before you approach. 
• Lead/Follow
  Every investment round has a lead investor. This is the investor that puts in the lion share of the money and occupy the board seat. The lead investor will also help you bring more investors onboard (usually investors that he or she knows or worked with in the past) and help you close the round. This is why you should start with finding a lead investor first and only then move to add more investors.

But we’re not done yet. Once you have a shorter list of relevant investors, you can shrink the list even further. Here’s how

The Human Factor

The investor you are going to bring in to your company is going to have a lot of influence on how you will operate in the future. This means that it has to be a person you are able to work with. Someone who you can come and consult with in bad times and be open to listen for advice. 

To get this information, you should approach portfolio entrepreneurs of each investor on your list and ask them about working with that investor.

Ask about communication style, board ethics, risk tolerance, have they ever fire a CEO, and how are they when things go south. The answers to these questions will give you a great indication on what it will be like on e the day after the investment.

Remember that once an investor give you money, you are giving away a lot of control in your own startup. Bringing in the wrong investor can cut your wings and make your life a living hell. On the flip side, bringing in the right investor can give you a layer of confidence and support that will get you through some rough times.

The above conversations are a great way to get warm intros. It’s exactly the ice breaker you need to start up a relationship with another entrepreneur (which has a lot of value on its own merits) that can later recommend you to your target investor.

Once you have a short list of relevant and potential investors it’s time to roll up your sleeves and get to work. Next week we will cover how to get to investors, so subscribe to the newsletter so you want miss out.

And in the meantime you can start your investors search here