Selecting investors

There’s a lot of talk about “value-add investors”, and while most of it is ironic it is coming from a more serious place. As the power has shifted from funders to founders, it has become increasingly important for investors to signal that they’re “more than capital” in order to get first access to entrepreneurs.

Probably to nobody’s surprise, I strongly believe investors can add tremendous value to a startup beyond capital - we spend every day trying to make it easier for entrepreneurs to succeed. That said, I’ll be the first to admit we should not get any praise if a company succeeds - all credit goes to the entrepreneurs. Some might call this a contradiction: investors work to add value but in reality they don’t. This is part of today’s post on how to select investors.

While all else equal, everyone would prefer a “value-add investor”, spending all your time figuring out which investor has to most “value-add” is a mistake in my view. Generally, there are three things to look for in an investor, which I would prioritize as follows:

  1. Capital to invest.
  2. No right to destroy. (If you don’t need to fundraise, I would put this at number 1).
  3. Value-add.

First and foremost, what you select investors that provide you with the funding you need to build your company on your own. Secondly, you want to make sure they don’t have any rights allowing them to take over control of your business. And thirdly, you want to select for ability to add value. Basically, you should not expect that an investor comes in and build your company with or for you. If they do, consider yourself extremely lucky, but don’t plan for it.

This prioritization should not be confused with how to approach investors. When doing that, you should reverse the numbering of the list above. When approaching investors, you always want to signal to any investor that they’re you’re preferred investor (because of “value-add x”) - even though you are really only looking for capital. I’ll cover this in a future post.

In other news, I’m taking a break over Christmas, meaning this is the last regular post of this year. Happy holidays!