If you’re a YC founder coming off the high of demo day, you’ll hear folks tell you to raise fast and get back to building. Just take whatever money is offered.
There is wisdom to that, but taking money fast and loose can also come with a hidden and longer-term cost. The people who land on your cap table, like the employees you hire, will affect your company and its likelihood of success.
Every founder has control over which investors they chase, and some are lucky enough to choose whose money they accept. That is, this is a decision where a little optimization goes a long way.
When you're going through investor discovery -- ie the process of figuring out who you should chase -- these four filters can help:
- Stage-specific: Do they invest in the earliest rounds?
- Sector-specific: Do they understand your sector? Will they quickly understand the problem you solve? Do they have industry connections that will be useful to you, that will lend you credibility in the eyes of potential clients and hires?
- Active: Many VC firms are not actively deploying, but they may still be taking calls. They’re suffering from a hangover after the boom years. CrunchBase and other resources will show you how frequently they pull the trigger, and how recently.
- Upright: Founder references and proprietary tools like Y Combinator’s investor database are the best ways to ensure you’re partnering with good people.
The check size/fund size ratio matters.* The larger it gets, the more the investor will care about your company's future, and the more likely they are to take your call. You can accept a lot of small checks from a lot of big names, but then you get crickets when you put out an SOS.
By raising from people who are betting some significant portion of their reputation and financial future, you are aligning their incentives with yours to grow your company. Otherwise, you’re just someone else’s beta — a play to diversify, learn from a new industry, and fodder for dinner-table conversation. None of those provide strong incentives to help you.
A firm with several billion dollar AUM can give you a million dollars and walk away. They are living off fees, not the alpha from your markup. Their check means survival to you; your startup means peanuts to them.
Some of the best investors for you are angels and firms you've never heard of, because you are raising a small early-stage round and those rounds are usually not big enough to make the news.
Here are some places to search for investors by stage, sector and activity:
A great way to find investors who are likely to understand the problem you solve, and be open to the kind of checks you need, is to look up startups that are adjacent to you (not direct rivals) and a couple years ahead. See if you can find the investors who backed them at pre-seed and seed. Stack rank them by quality in a spreadsheet that will be your CRM, just like you might build for early customer outreach. Then you find those people on LinkedIn, get their email with a tool like ContactOut, or find a warm intro.
Every cap table is a social network, and in fact, it's a stack of social networks, with every row on the spreadsheet representing a gateway to pools of capital, talent and potential customers. You should try to concentrate in your capital the access investors give you to the resources you'll need to grow.
The average American marriage last about 8 years. Most startups are a decade-long commitment. So the choices you make now will have long-term consequences. Just like you wouldn't get married to the first person who messaged you on Tinder, you shouldn't just take every check that walks in off the street, assuming you can choose among checks. Do a little homework and try to build a support network of people who really want you to succeed, and can help you grow.
* Disclaimer - I invest with a small seed fund called Page One so I'm talking my own book.