Seeking an Early stage Investor

By Rob Panepinto

At the UCF Business Incubator, we often work with entrepreneurs considering or actively raising investment capital to scale their businesses. In my career, I have raised capital for my businesses and been on the other side as an early-stage investor. When I work with entrepreneurs raising capital most of their focus is on the financial terms: Convertible note, SAFE, or equity; valuation, caps, dollars needed, use of funds, etc. All are obviously critical and hopefully set the stage for providing the company with the fuel it needs to grow while allowing both the entrepreneur and the investor a significant opportunity for financial gain in the future. However, there are other factors at play beyond the financial terms that an entrepreneur needs to consider as it assesses potential investors. As I remind entrepreneurs when they bring on external capital, they are not only acquiring capital, but new business partners with expectations and, if selling a majority interest in the company, a new boss.

Too often, these other criteria get short shrift in the capital raising process, so let’s discuss a few that you should consider when thinking about their ideal partner:

  • How actively engaged do I want my investor to be: Are you truly only seeking capital and looking for a passive investor who will be content to receive quarterly updates or do you want/need the investor to be an advisor or a mentor to the business as well? While most firms will say they offer this and they will certainly be involved as a measure to protect their investment, some firms, particularly at the early-stage investor level, will be more able/willing to engage than others. If seeking a mentor, you will want to ensure there is a good fit in terms of personality, experience, and culture. Also, make sure the investor has the bandwidth to give you the support you need.
  • Does my investor need to be an expert in my industry: Most early-stage investors tend to be generalists, focused more geographically then vertically. How important is it to you and the future growth of the business that the investor understands your industry? If so, even if not vertically focused on your industry, ask whether the general partners or advisors and limited partners have industry expertise they can share in support of the business.
  • What are my other needs: Do you need or expect your investor to make business introductions, support executive recruiting, etc.? Again, many will say they offer this, but if it is critical to your selection, make sure you ask for examples of how they work to support their portfolio companies beyond capital.

Ideally, you will have these criteria upfront so you can share them with the investor. Especially at the early stage, some firms or individual angels may not have the resources to give you everything you need. Others may want to be more involved than you want. Having these criteria upfront and communicating it will help you and the investor determine if they are a good fit.

Growth capital is the main driver for seeking an investor. However, thinking about these other important needs upfront in your selection process will help you pick the right investor for your business and increase the likelihood of the growth and scale you and the investor seek.