How to Check if the Founder and Investor Matches Before You Start Fundraising

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Like a flood Since pandemic-era venture capital is shrinking, startups must avoid the scarcity trap that comes with chasing investors’ dwindling dollars. And as markets change, founders need to remember the basics they learned during times of abundance.

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Investors are pulling back as recession fears grow. In the first quarter of 2022, global venture funding decreased by 19% to $143.9 billion, up from the previous quarter’s all-time high, according to CB Insights.

Whether you’re looking for angel investors to launch your business, or later-stage supporters to help you scale, the partners you choose today will impact the future of your company—from how you manage your company from day to day. day before your exit strategy. That’s why it’s important to choose investors who are a good fit and have a track record showing how they can act when the chips are down.

It is very important to understand who your partners are before you let them into the tent. Below, we discuss the key factors that startups should consider when evaluating investors in a changing environment.

Kick tires and get recommendations

Contact a potential investor’s portfolio companies, both current and former, to find out what their experience is. You will need to do this without violating any non-disclosure agreements, but the key question is how investors behaved during previous downturns. For example, in the second quarter of 2020, when COVID-19 upended the global economy, did they provide portfolio companies with a bridge through uncertain times, or did they advise them to find their own money?

At the start of the pandemic, investors at a VC-backed technology company we worked with helped the business manage costs, but initially refused to write checks. They also tried to use their blocking rights to prevent other investors from backing the company and then offered it terms that were significantly lower than the offer they had blocked while trying to gain control of the company.

Choosing the right partner for the right stage of your business can make the difference between building a billion dollar company and losing control of the business.

We were able to work with the company to prevent this. But these were people with sharp elbows, and the company was aware of the information in the public domain with the participation of the very investors who should have been noted. Pay attention to such signs if you come across them during your due diligence.

So what can you do? Interview people you know (including your attorneys) and the investor’s existing portfolio to find out what the overall reputation of the investor or fund is and what value they have brought to the companies they have backed. You can also ask funds for a link to a portfolio company where their investment did not pay off.

A conversation with the CEO of a company where things have not gone according to plan can shed light on how an investor handles difficult circumstances. Like anyone else, investors have reputations and inclinations, and this information is available to the founders if they are inclined to search.

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