How To Filter Startup Investors

How to filter startup investors? How should founders filter startup investors for their funding rounds?

From the outside, it may appear that startup fundraising is just all about bringing in money, however, and from wherever it can be found. Experienced and savvy entrepreneurs and founders know that who they choose and allow as investors in their businesses can be far more important than the money.

In fact, the specific investors that are brought in can be far more influential in the outcome, the scale that can be achieved, and how hard the journey is.

So, what should you be looking for in investors for your startup? How do you filter them?

Why Filter Your Startup Investors

There are a number of reasons that it is vital to filter your investors, and will benefit from doing so.

Equipping Your Business For Success

The investors that you install in your business can be far more impactful than the amount of money that you raise.

As we will dig into in a moment, there are a wide variety of ways in which your investors can help level up your startup, or derail it.

With the right investors, your company can go much bigger than you imagined, and a lot faster, and more easily. The opposite is also true. Just taking the first dollar waived at you could rob you and the world of your vision.

Optimizing Your Time In Fundraising

Fundraising may be essential, but it can also be incredibly time-consuming. Founders often find that fundraising activities can take up 50% of their time.

That’s not a task that ever goes away. Once you start raising and bringing in money from investors it is a cycle that just continues, round by round. It keeps on going by taking your company public, or finding another form of exit.

This can clearly be a substantial drag on building and managing your business. Anything you can do to streamline it and achieve maximum efficiency on your time is just smart.

By carefully filtering your investors, you will enjoy a more efficient and profitable process, while building in the ability to streamline future rounds and events.

Creating Targeted Fundraising Campaigns

Knowing your ideal investors in advance will enable you to tailor your pitch deck and other fundraising materials to those target investors. This will lead to a much higher conversion rate when pitching and presenting your pitch deck. Reducing the time and grind involved. While potentially attracting even stronger term sheets. So, take the time to learn how to filter startup investors as part of your fundraising journey.

Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

What Should You Be Filtering Your Investors For?

What is it that you should be filtering and screening investors for? What is it that savvy and experienced founders look for in their ideal investors?

The Money

Of course, money is still an important factor for many entrepreneurs and startups. Even though many bring in investors when they don’t even need the extra capital.

So, one of the first steps is to ensure that the investors you are considering have the money to invest. More specifically, that they have the amount of money you are looking for in this round, and that it is common for them to invest that amount. As well as, that they currently have that liquidity.

Fit For Your Pitch

You don’t want to waste your time pitching investors that aren’t a good fit for your pitch deck. Or at least you want to be sure that your pitch deck is tailored to be a fit for those investors you most want on board.

You should understand their expectations of a fundable pitch deck. Especially in terms of length, slide count, the flow of slides, and depth of data.

Investors often focus on specific niches, silos, and business models. Hardware investors can be very different from SaaS investors. Others may care more about putting ESG companies in their portfolios. Some prefer deep tech, health tech, fintech, or direct-to-consumer retail versus enterprise.

If you aren’t filtering for fit, you are likely to have a very frustrating and lengthy fundraising process. One which can last more than a year, with hundreds of denials.

Likability

You are going to have to deal with these people constantly for a long time. This may even be on a weekly basis for the next 10 years.

If you don’t love each other this is going to get very difficult and create an enormous amount of friction. Everything will be hard. Including raising future rounds, making basic business decisions, and even agreeing on an acquisition offer to cash them out and divorce yourself from them.

Your investors should be people you enjoy hanging out and conversing with.

Alignment In Vision & Values

This is one of the most influential elements which will greatly impact everything else.

Are they also passionate about your mission? Do they like your big-picture vision for the world you want to create, and the ultimate outcome or status of the company? These are basic must-haves for bringing in early-stage startup investors.

Not only do you want to be on the same page in terms of your endgame, but how you will get there as well. Do their values and principles align with yours on management, how you will execute on strategy, and critical factors like how to treat your team and customers?

If they do not, every day is going to be even harder. It will mean constant internal fighting, in addition to all the external challenges. It may mean your company ends up being exactly everything you wanted to change and do differently.

Other Resources & Connections

This is the number one reason that serial entrepreneurs accept outside investors, even when they don’t need the capital. They understand that the resources, experience, and connections investors can provide can make all the difference.

They may have talent, strong key relationships, and domain experience that can open highly valuable doors and opportunities. It can mean plugging into distributors, vendors, suppliers, and networks at a great scale, very swiftly. Including those that would otherwise be near impossible, or would take years and many more dollars to secure.

Specifically, look for investors that have experience in your domain, with taking a company from your current stage to the next milestone that you are aiming for. This is a great strategy you can when figuring out how to filter startup investors.

Business

Some strategic investors will also be business partners or customers. That means getting the money and help in building your product, from someone buying it. With the right logos on board, you can also dramatically increase your credibility in your industry. This is a tough combination to beat.

Who Is Actively Funding

You need to know who is actively funding, at your stage, ask amount, and type of funding (debt or equity). If they are not actively looking to fund or able to due to liquidity issues, the timeline of their funds, or knee-jerk reactions to crises, you are wasting your time pitching them.

How to Filter Potential Startup Investors

Where do you start, and what are the steps in filtering startup investors?

Do Your Research

Start off by conducting your initial research into the investors out there, and who may meet your criteria.

There are plenty of resources online for this, including sites like Crunchbase. Or you may commission research, or outsource it.

Use this to create your initial shortlist of target investors.

Ask Your Advisors

Reach out to your advisors or find a great fundraising consultant who can give you feedback on your list, add their own recommendations to it, and introduce you to the best-fitting investors. The experts are well-versed in how to filter startup investors, and their assistance will prove invaluable.

Screening & Background Checks

Startups should be doing as much vetting of their potential investors as the due diligence investors will do on them, if not more.

You may begin with basic Google searches. Dig deep through multiple pages to find any digital dirt or negative reviews they’ve hidden.

This should specifically include reaching out to other founders whom they’ve engaged with. Both those they funded and turned down. As well as those that they stuck with through an exit, and those that run into problems. It is easy to get along in good times. You want to know how investors have acted in tougher times and when there have been problems. That’s when it really counts.

Before you start evaluating investors for their suitability, you’ll start by creating a list of potential investors you can contact. If you’re not quite sure how to do that, check out this video I have created. You’re sure to find it helpful.

Meet Them

Even before you consider formally pitching them, or sending them your pitch deck, meet up with the investors you are interested in raising from.

Get together for a quick coffee, ask for their advice, and feel them out.

Meet Them Again

Repeat this step several times.

Repeat meeting them over time, without the pressure of fundraising. Get to know the real them as they unveil themselves. Just as you would dating a potential future spouse. Anyone can look and seem great when they are pitching and trying to sell you for five minutes. That’s a lot harder to hold up over a period of time.

Meet in different settings. Learn about their investments, their mindset, value, and their actions with other entrepreneurs they are actively working with.

Get A Second Opinion

This works even better if you get a second opinion from someone else. They may be able to see and pick up on things you don’t. They may think of different questions to ask in this process.

Consider taking your advisors, spouse, cofounders, and key team members to these meetings, lunches, dinners, and other interactions. Seeing them in different environments will reveal a lot more about them.

Pitch Them

Once you are sure about the investors you want to approach and would like to add to your cap table, start pitching them.

Be sure that you have curated your pitch deck, supporting fundraising materials, and virtual data room for these investors. Then present it.

Get their feedback far ahead of your need. Even better if this is before you are actively raising and have announced a new round. This gives you time to tweak your pitch or work on your metrics and other factors that can help nail it. It’s part of the process for how to filter startup investors.

Review Funding Offers & Term Sheets Closely

A lot can still be revealed about investors when they present their actual term sheets.

Are they being generous, and writing agreements in your favor, and for the best interest of the business itself? Are they following up and eager to do the deal? Or trying to play hardball?

Or are they nickel and diming you? Are they sneaking in predatory clauses? Or clauses that could weaken the business, and limit your control and position later?

Summary

Fundraising is the lifeblood of startups. However, more important than the money is who your investors are.

As a founder, you should be vetting them just as much, if not more, than they are conducting due diligence on you.

Knowing how to filter your startup investors intelligently will make all the difference in how smoothly and efficiently your fundraising process goes, as well as how great the relationship works out after you put the money in the bank.

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