During 5 years of working with startups, most of my experience gravitates around helping founders prepare to approach investors. Recently, I joined the other side. I'm now part of South Central Ventures, a manager of Enterprise Innovation Fund that invests 40 million EUR in startups and tech companies in South Central Europe.
I can't help but notice the discrepancy between investors as normal human beings versus how startups how startups see them. The biggest problem lies in a difference in expectations: when and how investors expect to be approached is entirely different from startups, who often get ahead of themselves.
Having seen it from both sides, here's the truth:
When to Approach? Before You're Desperate
Startups usually wait to build a perfect product before they go out and talk to investors. Investors advise something else: a lesson I learnt from Tatjana Zabasu, a managing partner of South Central Ventures, is that the investors expect startups to approach them before they run out of money and become desperate for an investment.
That's the worst idea. Instead, you want to pitch when you're in top form, with attractive metrics, and holding the power. Better yet, you want to start having these conversations before you're even looking for money.
This means that even if you don't need an investment immediately, you'll get the benefits of building these connections:
Talk Before you Need To
First, you will get to know the investors and by the time for investment comes you will have direct contact to reach team - instead of cold calling at a later stage. It's always better to negotiate with a warm lead than a cold one - you'll have gotten a chance to get to know them as a person before you meet them as an investor.
Second, the investors will have a chance to get to know you and provide useful feedback for your future development and growth. Realize that they are people who know the trends and follow the market, so you will probably get valuable insights and opinions.
Next, by engaging investors early on and allowing them to be part of your validated learning process, they will be able to witness your progress. If they see that you have a momentum and fast growth potential, your job in attracting investment is half done. If they see how you deal with roadblocks and blow past them, you'll do more to sell yourself than any pitch ever could.
And finally, you will get the chance to find out whether they are right investors for you. There has to be 'chemistry' between the startup core team and the investors, because at the end of the day if you get the investment, the investors will become part of your team. This gives you also the chance to choose and decide whether you like that investment or not. In case they are not the right investors for you, the chances that they can do a good job connecting you more relevant investors are much better than if you started looking for them yourself.
Seek the Warm Lead, Don't Barrage with Cold Ones
Instead of cold calls or emails, reach out to a credible friend, past investment, or investing partner you already know, and ask for introductions or recommendations to investors who would be good for you.
That might be a member of the board they are on, a founder of a portfolio company, an influencer in your industry -- the list goes on.
The point is, investors usually get many inquires and one way for you to stand out is to get highlighted as valuable and worth paying attention to by someone they trust. Many venture capitalists won't even respond to startups that don't have a warm intro -- their dealflow is just too large.
Step back and be smart about building a 'critical path' to the investors. This may affect the relationship you build with your future investors. This is just the beginning. Make it right, so that you don't need to look for a second chance for first impression.