Creating a target list of investors is one of the most useful strategies to securing investment for start-up founders. Raising money can be difficult, and this is compounded by using a scatter-gun approach to identifying potential investors. A targeted approach bears fruit more effectively.
In this article, I'm going to explore the advantages of building a target list for investors. I'll also show you how to create your very own bespoke list to significantly increase your chances of securing investment for your business.
Why Every Founder Needs a Target List for Investors
21.5% of businesses fail in their first year. This isn't always because a business is badly run or has a flawed product and marketing strategy. It is often the case that this early trend for failure is purely due to an ineffective pitching strategy.
It may sound counter-intuitive, but even with the perfect pitch deck which you may have found on a site offering business templates, you can still fail to secure investment. Imagine playing jazz music to an audience which only likes hip-hop. You might be a fantastic musician, playing great music, but with the wrong audience, you can still get booed off the stage.
It's the same for investment.
You need to find the correct audience in order to pitch your ideas. Successful funding rounds are in essence a marriage between the perfect pitch and receptive investors. By building a target list, you can ensure that you are playing to an audience who will be interested in what you have to say.
Content Analytics recently raised $9million worth of investment, and as CEO of Content Analytics puts it: “There are lots of investors. There are relatively few that are right for your startup”. Keep this in mind when doing your research for your list.
How to Build an Investor List
To build your own list, you should focus on four key areas:
- Your Niche
- Your Location
- Your Funding Threshold
- Your Timeline
Each of these points will inform your list as you build it. Let's look at each now in more detail, with some suggestions on how you can incorporate them into your target list.
Your Niche: What do You Have in Common?
It's a common mistake: Entrepreneurs look to find any investor, no matter what their interests are. Of course, there will be times when an investor is trying out a new industry for the first time, but for the most part, you want to find investors who already have experience in your niche or industry.
As much as you can, look for investors who have previously invested in your niche, preferably those who advertise upfront that they are interested in your industry. If you contact a wide range of investors without knowing what they tend to invest in, you'll end up wasting valuable resources and time on your pitches.
Going back to that failure rate of 21.5% within the first year – the time is of the essence, especially during pre-seed, seed, and Series A stages. You can't afford to waste your time pitching to an unreceptive audience. Maximize your chances by identifying investors who are clearly open to your type of product and business model.
The added advantage to this strategy is that if you secure one or more of these investors, they will most probably already have industry contacts to help your business grow.
Your Location: Where are You and Your Investor based?
The world is a much smaller place today. With remote working and meetings possible over video streaming, it shouldn't matter where your investor is based, right? Unfortunately, this is not true. Your location and the location of your investor often matters.
Take venture capital firms, for example. There are many which specifically expect you, the entrepreneur, to either be based at their location of choice or to relocate there. This is especially true of accelerator programs like Y Combinator, as you have to be where they are at least for a few months in order to work together on your business.
Even before the larger Series A funding rounds, angel investors at the pre-seed and seed stages often show preferential treatment towards local entrepreneurs. It's a way for them to invest not just in you, but in their community where hopefully your business will create jobs and infrastructure.
The location also matters when it comes to the valuation of your startup. A Silicon Valley or London based FinTech company will often have an inflated valuation versus a small app designer in Wisconsin. This affects how much you can expect to raise when approaching investors.
There are some investors who don't care about location. If you are not able to relocate your business at least for the first few months after investment, you should focus on investors who are local or unconcerned about your location.
Your Funding Threshold: Can the Investor Really Help?
Whenever you enter the funding round, you need to have a clear target for investment. This is how much money you need to meet your initial objectives and get to the next fundraising stage. It will also include how much equity you will sell and what sort of capital structure you are willing to implement.
Combined, this tells you two things:
1. What flexibility you have during negotiations
2. Which investors can actually afford to meet your investment threshold
If you know enough about an investor or VC firm to anticipate that they will ask for too much equity or will provide too small an amount of capital, then ask yourself if it is really worth contacting them.
Of course, you can bring on multiple investors to reach your investment threshold, but this usually means further diluting either your share of the business or those of existing investors. Look at the amounts of investment made by an investor, if publicly available, and judge whether they should be on your target list.
Your Timeline: How Quickly do You Need to Move Forward?
I keep coming back to that first-year failure rate for businesses, but that's because it's important. Some businesses need capital and cash flow quicker than others. This will depend on existing financial reserves, the window of opportunity to launch an effective product or service, and whether a business is already profitable.
You should identify your timeline for investment, and not just for your upcoming funding round but for those after. Try to put investors on your list who can continue to support you across your specific timeline.
Consider the following:
- Will the investor want to speed up your business plan to the detriment of your product?
- Does the investor have the resources and desire to invest in future rounds?
- If you are looking for more than just investment, will the investor be able to facilitate you with guidance and industry opportunities within your needed timeline?
Every business is different, with its own timeline of needs and growth. Include investors on your target list who have shown they can work with a company rather than pressuring it beyond what is reasonable.
Remember that before you go out fundraising and targeting investors you are going to need a great pitch deck that captures the essence of your story.