Investors rarely make or break a startup, but they can make life a hell of a lot easier or harder for an entrepreneur. That's why entrepreneurs need to put some thought into who they want to add to their team, instead of taking the first money that's offered to them.
But how do you choose the right investors for your startup?
There are hundreds of factors to consider, but some stand out more than others. While anybody can give you money, only a few can give you the sage-like advice you need to succeed. And while adding a big name can be helpful to your cause, it isn't as important as working with investors who understand you and your goals.I'm a professional investor now, so I'm biased when it comes to the qualities entrepreneurs should look for in investors. That's why I decided to ask five entrepreneurs who have raised funding to impart their advice for my Social Analyst column this week.
Here are their tips:
1. Find investors you can trust
"Pick investors who believe in you personally and who you feel you can be open with," said Danielle Morrill, Referly co-founder and former director of marketing for Twilio. She advises companies to find investors they can trust and won't abandon a business when it's going through rough times.
"In the earliest stages of the company, a lot can change. Many experiences are new and even scary, and knowing you can trust them to have your back when you are most vulnerable, and tell you what you need to hear (not what you want to hear necessarily) in those early days is priceless."
2. Find investors who solve your current problems
GroupMe co-founder Steve Martocci, who in 2011, says that you need different types of investors for the various stages of your company's life cycle.
"In our first round, it was important to find investors who believed in us and allowed us to execute on our vision without getting in the way," Martocci recounted. "We got great support and product feedback from our seed investors without the need of giving up a board seat."
Martocci and his team faced other problems later on though, which required different investors who could help them solve their biggest challenges.
"In our later round, it was about finding investors who could add value by helping solve our biggest problems -- in our case, carrier relations and SMS costs," he said.
GroupMe's co-founder had one last piece of parting advice for New York-based startups. "I'd also advise New York startups to look to the West Coast for at least one high-caliber investor," he said. "We benefited in a huge way from the experience and networks of the Silicon Valley firms we worked with."
3. Investors who tell it to you straight are priceless
Finding the right investor requires the right combination of qualities: passion, a strong Rolodex, deep pockets, etc. However, McLoughlin doesn't think any of those qualities are the most important.
"More than anything, though, you want an investor that you really connect with," McLoughlin advised. "The going may not always be good, and having someone you can be straight with (and who is going to be equally straight with you) is priceless."
When it comes to putting together a funding round, especially at the seed stage, diversity matters. According to Enplug co-founder and CEO Nanxi Liu (previously the founder of Nanoly Bioscience), you want to have investors with complementary skill sets.
"We selected investors from diverse industries," Liu said. "For example, our investor team includes heads of major financial institutions, Grammy-winning musicians, ad agency executives, and CEOs of major tech companies. We started doing this early on in our fundraising, which made it easier for us to convince new investors to join."
This is especially true for a young team. The experience of smart investors can make or break a company. "Our founding team and employees are in their 20s and 30s, so our investors add the 'gray hairs' that others like to see in an organization," Liu added.
5. Find investors who are aligned with your interests
Neal Sales-Griffin, the founder of Chicago-based startup Starter League, which teaches people how to code, took a different approach to investors than most, especially since his company was profitable.
"Jason Fried of 37signals and I got to know each other over a year's time. We met when I merely had an idea, and while he thought it was interesting, he didn't have a lot to share before I had made some real progress," Sales-Griffin said.
He added that he had several investment opportunities, but turned them down because he "wanted to build a business that wasn't dependent on outside resources in order to be viable." That's when the conversations with 37signals heated up, eventually resulting in a small investment.
"After a series of conversations, we realized we had aligned interests in education," he said. "That's the key for any investment I think. Aligned interests enabled us to get the deal done in a way that we were both charged about."
"I shy away from investments that are designed in order to get a return via an exit or an acquisition," Sales-Griffin added. "Look for investors that want you to become a great, long-lasting, sustainable business. Ensure they truly believe in your mission."
Sales-Griffin's final note is that it should never be about the money. "The real value is in the regular hands-on advice and strategic support," he concluded.