When thinking about financing your startup, it is important understand different types of potential investors.
Not every wallet is right for you.
Figuring out who to raise money from and why will save you time and yield better results.
1. Friends and Family
Often times the first check comes from a family member, or a friend. In theory it is a lot easier to close them because they already know you. In practice sometimes this is awkward, and may lead to awkward situations in the future.
For example, if a friend gives you 10K and the company goes belly up you may lose this friend.
Think carefully before taking money from family and friends. It can be awesome, or it could be bad. Every situation is different.
Another thing is that friends and family members may not clearly understand the risk and how startups work. Take the time to educate them, and if they get it and still want in, then you are all clear.
2. Angel Investors
Angel Investors put 10K-25K-50K-100K (lower is more common), and can participate in priced or debt rounds. Angels can be very valuation sensitive. It is important to distinguish between active / professional and occasional angel investors.
Ask them how many deals they do per year, and look them up on AngelList. If someone only does a few deals a year, only talk to them if they have approached you, or someone gave you a warm intro, or they have relevant experience and background in your space. Otherwise, infrequent investors should not be on your target list. Occasional Angels will take longer to close, and will be more flaky.
Active / Professional angels will do at least 6 deals per year, and usually more.
Expect to close them within the first 1-3 meetings. It is totally fine, and a good idea, to ask them if they are interested in the end of the first meeting.
Before you meet an angel, understand what they are interested in. Read their AngelList profile or ask via email to make sure it is a fit. Don’t go after people randomly – it will be a waste of your time, and their time. Confirm with whoever introduces you that the introduction makes sense. Target well.
3. Angel Groups
An Angel Group, as the name implies, is a bunch of angels investing together and sharing deal flow. Angel Groups can do priced rounds, and if a significant percentage of the angels in a group get interested, they can lead your deal.
Angel Groups meet regularly, and have a regular pitch process.
Some do more due diligence than others, but typically several members of the group will be assigned to do the diligence if your initial pitch goes well.
Your check will range from 50K to 500K typically, and you will end up with every individual angel on the cap table. That is, these groups are not syndicates, and unlike AngelList Syndicates, they don’t have carry fees. Angel Groups are also valuation sensitive, and will typically price the rounds lower compared to VCs.
4. AngelList Syndicates
AngelList Syndicates are the most effective way these days to raise money on AngelList. Syndicates are formed by influential angels, and range from a few hundred thousand to over a million.
The key thing is to identify angels who have these significant syndicates on AngelList, and get in front of them.
If you can get such an angel excited, he or she will run the syndicate. For example, the angel might put in 50K, and then another 250K will come via a syndicate for a total of 300K raised via AngelList. Note that the amount raised via syndicate varies, and is not guaranteed.
5. Micro VCs
This is either an individual writing 100K+ checks or more likely a firm with 10MM-50MM under management. The individuals are basically angel investors with a bigger sized check. They will commit to invest or will say NO after 2-3 meetings. They may lead, and be comfortable doing either debt or equity.
Micro VC Funds will likely take longer, and would not be too far off from a typical VC. You will likely need 3-4 meetings to get to a decision.
Micro VCs in NYC typically do 250K – 500K and can price and lead your round.
Micro VCs do care about ownership, and ability to follow on, but to a lesser extent than VCs. They are not looking for 20% of your company, more likely 8-10% and re-up in the next round (depending on the size of their fund).
Like with angels, you need to decide whether a specific Micro VC is right for you. Spend time studying their portfolio. Some specialize in SaaS, some are focused on Consumer, some in e-commerce, some in infrastructure. Not only do you need to understand each fund, you need to understand each partner.
Partners have different experiences and focus areas, they have different preferences for companies as well. Target specific partners in a specific fund. Carefully research their portfolio, and see if it is a potential fit.
Traditional VC firms have fund sizes ranging from 100M – 500MM. For seed deals they would do as low as 250K (atypical) to as high as 2MM. Most likely 500K – 1MM would be their sweet spot. They really care about % of ownership, and would likely only do the seed if they think they can do series A as well. That is, they would want to buy up the ownership to be at 15%-20% after series A.
Another thing that is critical for every fund to understand if they are currently investing: Some funds may not have the capital because they are in between funds, but they would spend the time with you anyway. It is probably not the best use of your time though.
Figure out who will be the partner on the deal. With larger firms it is not always obvious. Look at how many companies they are involved with and ask them how many companies they typically manage. In a 150MM – 300MM fund, a partner would have 8-12 companies at any given time. 10 is really a lot.
If the partner is already busy, they won’t invest even if they like you because they are at capacity.
Research how many investments the partner has to understand your chances.
Ask them what their process is like, and how to best follow up. Each firm may have a unique process and you need to understand it upfront so you can know what to expect. Set up clear next steps and follow ups. Be direct, and ask if they are interested in continuing the conversation. Try to avoid the vague state of MAYBE. If yes, then what is the next step – meeting, etc. NO is okay, you will get a lot of those. NO is better than a MAYBE.
7. Mega VC
Mega VCs are firms that have over $1BN under management. These include Andreessen, Khosla, Kleiner Perkins, Sequoia, Bessemer, etc. Some of them do seed investing, but recognize that the seeds for these guys don’t move the needle at all.
Research whether the fund has a seed program. If they do, figure out who runs it and what the process is.
It is likely that there is a partner in charge of seeds and the process is compressed compared to raising more capital.
Recognize that VC funds need to deploy large amount of capital per deal to be able to return their massive funds. Rather than spending time trying to get their attention, for your seed round, it may make more sense to start building relationships with them for Series A and B.