An Information Memorandum (or Investment Memorandum, “IM”) is the most commonly used disclosure document to…
A Guide on How to Rank Your Investors
Investors can bring so much more than to the table and the type of investor can have a dramatic bearing on your venture’s success. So who to bring onboard?
For any budding entrepreneurs or founders, the act of fundraising is an essential process. Particularly for startups, it is essential to forge strategic partnerships with investors who will help take your company to the next level.
Selecting your investors is a very dicey decision that entrepreneurs have to make, and it can make or break your whole company. Like most aspects of business building, ranking your investors should be carried out with research and care.
So how do you go about ranking your investors? How do you know which investors are top-tier, mid-tier, or low-tier? We’ve compiled this list of criteria to help you ease your ranking process.
Essential Characteristics for Ranking Investors
This is a critical element when ranking investors particularly for an inexperienced startup. ‘Smart capital’ can help you steer the course correctly and can add a valuable perspective to the business which it may not have had originally.
Asking lots of questions can help you determine the potential of a fruitful relationship. Do not hesitate to ask questions about the previous ventures that the investor has participated in and whether those ventures were similar to your business or startup.
It will be very insightful if you can contact the owners of the companies that were previously (or currently) supported by the investor.
Any investor worth his or her salt in expertise will not only support you with cash but will have much more to offer because they are well aware of the hurdles you will face in the industry and will guide the growth of your venture.
Always put the most experienced investors at the top of your rankings.
Has Sufficient Capital
It is a fact that in any business, particularly for startups, money does matter a lot even if it is not everything.
Having sufficient cash flow will help you reach your desired goals at a consistent pace. Different investors will have different approaches to how they wish to play a role in your company.
However, it is important in the early rounds that your main investors have ample funds to aid your company throughout its lifecycle and not just for a single raise.
Procuring sufficient capital will play a dominant role in laying the road works for your company to become a multinational corporation.
Along with capital, it is vital to know how to utilise your capital properly. An experienced investor will not just be vested in their returns, but guide you in proper money management.
Networking is one of the basics of business. One of the most significant value-adds that an investor can provide you with is their network.
Networking is essential because making connections with the right people can open many doors which would otherwise have been difficult. Investors are often well versed with the industry and have relationships with a lot of influential people, particularly other investors.
Forging connections with the right people will give you new opportunities and solve significant problems.
Rank your investors according to the size of their network and number of connections. The more extensive the network, the more opportunities will be opened to your company.
Supports Your Vision
Most investors will campaign to play an aggressive role in your startup or company.
But remember that there is a thin line between offering insights, productive thoughts, wisdom and flat out steering the direction of your company.
A good investor must be aware of the fact that you are bound to make mistakes, and the aim is to avoid as many as possible. They must be willing to help establish your company’s goals and not just outright implement their ideals.
Find investors who will guide you through the hurdles while at the same time aim to realise your vision. Avoid investors that want to swallow your company whole unless you plan on an exit.
The primary aim of investors is obviously the returns on capital, but there are some angels among investors that genuinely want to help founders succeed.
Managing expectations is often an overlooked aspect, but can be a major determining factor in managing your own stress levels!
You have to be careful that the investors have realistic expectations about the growth timeline of your ventures and when you realise your goals.
The investors should also maintain realistic expectations about the long term profitability of investing in your company.
Unrealistic or high expectations can levy tremendous pressure on your company and compel you to take hasty decisions which can often be costly and detrimental to establishing long-term value of your company.
Be cautious and choose investors who are flexible and maintain reasonable expectations.
Last but not least is how compatible you are with your investors.
This is a crucial element in seamless business dealing. Be sure that there are no communication barriers and that you are comfortable enough with your investors for the smooth functioning of your business.
Compatibility should be an uncompromising factor from the very beginning. You are embarking on a long and arduous journey with your investors, and it will be filled with success and failures.
So, it is vital that you and your investor are on the same page and share similar ideals from the beginning.
If the investor’s ideas for your company are too much of a contrast to yours, it is better not to get into business in the first place.
Making a niche for your company is going to require a lot of patience and hard work. Investors are there to give a helping hand and guidance.
They place a crucial role, and the right ones can be undeniably impactful for your company and its vision.
While there is no concrete guideline towards ranking your investors, but the characteristics mentioned above will help you rank your potential investors and narrow down your choice for your ideal investor.
It is sporadic to find an investor with all the attributes mentioned above, but the apparent pick should be the one that has the ideal characteristics.
It can be a challenging job to rank and select your investors, but with this guide, you should be able to get a clearer picture of the direction you should head towards in securing the ideal investor.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, agencies and entrepreneurs.