Startup fundraising is a sales process, and as with any sales process, you want to be pitching to people with both the intent and the ability to buy— in this case, shares of your company.
Thus, a key best practice is to cull your prospective investor list until it's comprised only of qualified targets. Here are several filters to apply:
1. Industry: This should be obvious, but I still see a lot of entrepreneurs pitching to investors who clearly don’t invest in their space; it’s a huge waste of time and social capital for both parties. The burden is on you to figure out relevancy and fit in advance of reaching out.
How to filter: A good place to start is by running a search on AngelList or by using Foundersuite’s investor search tool (which we built on AngelList’s API), or even by hunting around on Quora. All of these services are useful for generating a broad master list. Next, scan each investor’s LinkedIn and AngelList profile page to find “deal patterns.” In addition, many investors explicitly state what types of deals they are looking for in their profile or bio.
2. Stage: Another common mistake is when founders pitch to the wrong stage of investor- for example, when a seed-stage startup pitches to a large Sand Hill Road venture fund. These investors will often take a meeting, but it rarely goes anywhere. Worse, they might be scanning for competitors to a portfolio company, or using the meeting to get up to speed on a new industry. It happens frequently.
Thus, are you Pre-seed, Seed, Series A or later? The criteria for each stage tends to shift around a bit but in general, if you’re pre-revenue you’re likely pre-seed, and your deal may be more relevant to friends & family or crowdfunding. If you have revenue and you’re starting to grow, you’re likely Seed; and if you have both revenue and are growing really fast, you’re a fit for a Series A investor or beyond.
How to filter: Study the language on investors’ websites and LinkedIn profiles for clues, but read between the lines. For example, VC firm Bloomberg Beta states they like to be the “first money in” which usually means the first institutional money in (i.e. Series A), but in their case, they’re actually looking for seed deals.
Other points of confusion include the label “growth investor” -- it sounds early stage, but it really means they’re looking for revenue of $1M or more and thus such investors tend to do only do series B or later deals. Another clue is the size of the fund: $25 - $75m funds tend to do Seed and A, whereas larger funds— because they need to put so much capital to put to work— mainly focus on Series A and beyond.
3. Geography: A modern riff on an old fundraising rule of thumb is that investors "prefer to invest within a one-Tesla-charge radius of their office." This is still often the case, but many newer seed funds are relatively location agnostic, and some, like Point Nine Capital, are decidedly global.
How to filter: Again, sites like AngelList and Foundersuite helps you search and sort investors by location, but you should also scan investors' LinkedIn and Web pages. If they explicitly state they focus on NY-area startups, and you’re based in Seattle, it’s probably not a match, and you should focus your efforts elsewhere.
4. Available Capital: In short, does the investor have any money? Has the VC firm recently closed a new fund, or is it almost out of “dry powder” and was unable to raise a new fund? There’s little value in pitching to a fund that is winding down— the odds that they will make a new investment are thin, and you probably won't be able to turn to them for follow-on rounds.
How to filter: For angels, this one is tough. You can roughly triangulate whether they have any money based on the size and recency of their last exit. For VC funds, it’s a little easier- search on VentureBeat or in the subscription-based Pitchbook for announcements of the closing of a new fund. If they haven’t raised a new fund in the last 4-5 years, they may be a "zombie fund" and are probably toward the end of their investing cycle.
5. Deal Activity Level: Related to available capital is the question of whether the investor is actively investing. Many angels go through a spurt of fevered deal activity, then close the checkbook for awhile. Similarly, many VC firms that are nearing the end of their fund only invest in existing portfolio companies. Unfortunately, both of these groups will still take a meeting — and take up your time — so be wary.
How to Filter: Mattermark does a good job of identifying the most active investors (and indeed, Mattermark's roots trace back to when Danielle Morrill first built a list of “zombie funds”). Other sources to check are AngelList and Crunchbase, where you can enter an investor’s name and see their investments, as well as when each deal was made. Increasingly, the data is being shared and synchronized between these two sites.
6. "Founder Friendliness": Investors can provide a lot of value, but there are also a few bad actors in the mix. Fortunately, in this era of increased transparency, unscrupulous investors are being squeezed out, as Paul Graham eloquently discusses in his recent post about Ron Conway. Nonetheless, you still want to optimize for ethics, integrity, and overall “goodness.”
How to filter: Prior to a pitch meeting, a good place to start is by trolling TheFunded.com. It's getting a bit long in the tooth, but it's still a treasure trove of information. Another way to preemptively check on an investor's integrity is by asking a community of entrepreneurs, such as FoundersNetwork, or by posting a note to the alumni base of an accelerator. There's a strong chance someone in the group has met with that investor and can offer some color commentary. Another method is to reach out directly to CEOs of their portfolio companies. Most will be happy to give you relatively unvarnished feedback (and occasionally, they’ll even offer to make the intro).
7. Gut Feel: You’re going to be working with your chosen investors for several years, so it's incumbent upon you to find folks you get along with and communicate well with. You don't need to become buddies — as Steve Blank writes, “VCs are not your friend” (i.e. ultimately, they have a fiduciary duty to their LPs, not to you). But you need to have chemistry; you need to have a good rapport, otherwise it will be a long and bumpy ride.
How to filter: The best way is the “would you want to share a beer with this person" test, and the best way to do that is to actually share a beer (or several) with that person. See how they act as they loosen up and let their guard down. Enough said.
So there you have it— 7 ways to screen your target investor list.
But Why Is Screening So Important?
Why bother? Why not just pitch everyone who will take a meeting?
First, because screening your list will save you a ton of precious time. Fundraising is already a massive time-suck, and it is maddening to drive from SF to Palo Alto to meet with an investor who, after hearing your pitch, says his fund is “tapped out” and they’re not doing any new deals right now. These meetings can easily chew up half a day. Prevent and avoid them at all cost.
Second, pitching to a tightly-focused list increases your odds of getting some heat and momentum around a deal. In other words, pitching to those with both the intent and the ability to buy means your hit rate will be higher, which means you'll get a commitment sooner, which you can then use to create urgency around the round. Momentum feeds on itself.