Advanced Investor Pre-Qualifications
Advanced investor pre-qualifications is about uncovering tacit knowledge about investor preferences. You do that by networking.
If “essentials” is mostly about hard facts, many of which are available online, then “advanced” is about finding out “softer” data. Such information can often be extremely important. Examples include:
Does this investor lead? Occasionally, you can find that out online, but often it’s hard to be sure.
What does this investor like and dislike? Where have they been burned? Where have they made money? What are toxic words and what are magical words? All investors have their own unique personal flags they want to avoid and keywords and ideas they are looking for. Learning about these before the meeting is the key to having a successful conversation.
What is the investor’s attitude towards data? Towards vision? How do they think about product, team, traction, market? Every investor has a set of beliefs about how startups come together and what matters / doesn’t matter. Uncovering these will help you position yourself successfully.
What do they know about your space and what do they believe or not believe in? When they heard your competitor’s pitches, what did they think? Such information will allow you to assess whether there is a shared vision, which is the foundation of every partnership.
How do they make decisions as a firm? What are the power dynamics? Who do they trust, both inside the firm and outside the firm? Understanding VC decision making is a crucial part of getting to a term sheet and closing the deal.
How do they help their portfolio companies? How do they behave when things go south? As they say, actions speak louder than words. That’s why getting a sense of actual investor behavior from a fellow entrepreneur is a lot more valuable than reading VC websites.
This is but a small excerpt from a much longer list of questions that every founder should ask themselves as they consider partnering with an investor. Such questions are important because:
- You can’t fire an investor except in some truly odd situations.
- They can fire you and will do so if they believe you are not capable of taking the company to the next level.
- Most founder-investor partnerships last 7-10+ years, i.e. longer than the typical marriage!
- Investors have significant influence, both on the company via special rights and board seats, as well as on founders’ psychology and mental being and thus performance.
That’s why being extra careful is worth every penny and then some. The more you know about an investor, the better your ability to qualify them as a good fit for your business plus the higher your chance of pitching them successfully.
The bad news is that almost none of the data listed above is Google-able. People simply don’t talk about this kind of stuff online and even if they do, they self-censor themselves. Not to mention that the half-life of such data is rather short - something that an investor believed strongly last year might no longer be interesting a year later, be it because they changed their mind or because the market changed or because they already placed a bet and are not looking for more exposure.
The good news is that this information exists in the heads of people, who are in the startup game - obviously investors but also founders and executives who work with investors on a daily basis. And, since the world and especially Silicon Valley is a pretty small place, getting to uncover such information is not as hard as it might seem. It “simply“ requires getting out there, meeting people, and learning from them. Part of that will come during fundraising, which I discuss in Phase II - Fundraising. But you can do a lot to prepare beforehand, which I talk about in Network with VC-backed Entrepreneurs.