How to pick your lead investor?

Now that you know how much you want to raise and how to time your next funding round, the last thing you need to consider is which fund to choose. With a good deck and business plan, you should attract more than one investor. When the time comes, you might have to make a choice and decide which fund to go with or who you want on your board.

Here are eight things to look for in your lead investor to choose the best one for you and your start-up!  

1. Are they good to work with?

First, you need to feel comfortable working with them and get on well. This can mean whether you have a rapport with the team, whether they are constructive and will try to bring out the best of you and your company. Do they inspire you? You will be working side-by-side with your investor for a while, so making sure there is a good fit is important.  

2. Do they have similar expectations of the outcome required?

Consider whether they have similar views on the world and in particular similar views for the future of your company and the sector you are in. If you have wildly different views on the field and its future, it might not be the best fit. Likewise for the magnitude of the target exit valuation.

If ‘Big Fund Capital’ needs you to return their entire £1bn fund, that is fine, but you must be aligned, or it will be an exceedingly difficult journey. If you do not also want to create a MASSIVE company, you will be pushing for conservative, low risk options while they push for high-risk strategies and aggressive growth. You need to make sure you have the same expectations for your startup for the foreseeable future. Likewise for Small Fund or any other investor!

3. Are they wasting your time?

Look into the fund before you get into any talks with them. Check how many investments they make each year (at your stage) on Crunchbase or from press releases. If they have raised a fund in the last 3 to 5 years or appear to be actively deploying that is great. Otherwise, there is a lot of “zombie” funds out there, so be mindful of your own time!

4. Do their portfolio companies like them?

A founder will never lie to another founder because they know the damage a bad investor can do. Do a few reference checks. Ask for intros to founders that had a harder journey as well as the well-known logos (because everyone is nice to their star performers) or get a backdoor reference.

Having said that, be careful with references as you are hearing just one side of any story. The important thing is to understand whether the investor or board member handled even the difficult situations professionally. Speaking to other board members might be a good way to get a second opinion, so be thorough in your research (see # 6 below)!

5. Do they have ability to support their companies?

Investors with the ability to support you through a bridge or follow-on round can be invaluable. Likewise, if a fund invests in you and then does not follow in the next round (while they are able to do so), this can be a red flag for prospective future investors.

For example, a good and supportive investor will invest pro rata in follow-on rounds led by another party, as well as supporting companies in internal rounds where there has been good progress since the previous funding. At Nauta we always try to do exactly this where situations and ownership structures allow.

Do consider how many boards they are on. If they are on numerous boards and can maintain the same level of care across all their portfolio companies, then that is fine. However, if they cannot, then ask yourself if this will be a good fit for you.

6. Do they work well with other investors?

It is not rocket science: if your competition and peers like you, then you are probably doing something right. Other investors will not tie their money in with someone that they have had bad experiences within the past; it is a small world and if there are red flags, people will know about it through the grapevine. 

7. How do they work with their companies?

Understand how they work with other startups. Do they have monthly calls on top of board meetings, only board meetings or do they never want to hear from you again once they have sent you the money? Are they vocal in boards? Do they support you on the things they have promised?

Note: GOOD investors will make intros for FREE rather than expecting a better valuation in exchange! That is not value added!

8. Where does their money come from?

Money is money, right? Does it matter where they get their money from as long as you get a chunk of it? Well, morally that is up to you but it becomes more of your problem if their largest LP can pull their money at any time or if someone has questionable ties to an organisation or another (drugs, weapons, counterfeit, take your pick). It might not seem relevant now when the money is available, but it could impact you in the future, so do your research!

Finally, one last thing worth looking out for is fees, particularly for EIS and VCT funds in the UK. At Nauta we operate as a traditional close ended GP:LP fund, and we are fully funded to run our operations. Hence, we do not try to extract any money from our portfolio companies with ‘monitoring fees’, ‘board member fees’ or any other concept, and we expect no other VC investor to do so in our portfolio. For all startups we suggest either avoiding these fees altogether or, if that is not possible, make sure that the fees are reasonable and are offset by a larger investment amount and terms for your round.