What to Look for in a Venture Capitalist

When you are a startup looking for an investment, and venture capital funding can seem like a great thing. However, it is important to know that the venture capital investor you have on board with you is the right fit for your startup.

Investors don’t really folk over their money easily; they conduct due diligence on the companies they are interested in and only then make a deal. You should know that your investor will look into your company and your professional portfolio as an entrepreneur. Similarly, you too should be ready to conduct some due diligence on your potential investor.

Remember that where your investment comes from can also be a major factor in how far your company can go, not all investors are the same. The personality of the investor and the business method they choose to use could prove to be either great or absolutely terrible for your startup. The investor may be great in their arena but are they good for yours? Some background research and quick knowledge of the investor could go a long way in creating business relationships that last.

Venture capitalists usually specialise in building high-risk financial portfolios.

With venture capital, the venture capital firm gives funding to the startup company in exchange for equity in the startup.

Here are some things you should consider before you begin work with a venture capitalist or receive funds from a venture capital fund. These seven things are critical – the personality of the venture capital funding investor, domain knowledge and prior experience, active or dormant investing, track record, strategy, stage, and tenure.

The personality of the investor

Just like with everything else, here too the character of the person you are going to be working with is very important. Choosing an investor is pretty much like selecting a co-founder for your startup. Remember that this is not a short term relationship. Both of you will be working together for the company for as long as you can until the company closes or one of you decides to leave. Choose someone whose personality is the right fit for you, making the decision more about interpersonal relationships rather than venture capital finance cash. Ask yourself if this is the person you want to be around when the going gets tough.

Domain knowledge and prior experience

Once you have established that the personality of the investor is just right for you, another vital thing to look for in an investor is their domain knowledge about your industry. Also, what, if any, previous experience they have in this field. While they could have been a successful investor in a completely different sector, can they bring value to your company if they have no expertise in this particular domain?

Active or dormant?

Is the investor actively involved in venture capital finance investing at all? Many people claim to be actively investing and meet entrepreneurs scouting for the perfect deal, knowing whether your investor has made an investment in the past year can help you know whether you are just wasting your time.

Track record

Knowing about the financial track record of your investor can help you ascertain what to expect from them. Choose people who have a good reputation and are well connected. Stay away from investors whose bad reputation precedes them as your credibility is at stake here.

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Strategy

What is the strategy of your new investor? A strategic investor should be able to bring in value apart from the monetary investment. Does the investor have connections in your industry? Will they bring with them any strategic advantages that will make your business more relevant?

Stage

The stage of your company and the investment fund are both essential aspects to consider when selecting an investor. If you are looking for early-stage funding, then you shouldn’t be wasting your time talking to investors who only invest in later-stage rounds.

When choosing a fund, remember that it is better to receive venture financing from a venture fund that is still early in its lifecycle. The early stages of a Venture fund are when venture capitalists invest actively. When the fund is reaching the end of its lifecycle, the investors seek cash returns from their investments.

When a fund is closer to the end of its lifecycle you should be prepared to provide a liquidity event, getting an investment from a new fund which is early in its lifecycle will reduce the pressure on you to accept premature liquidity. Another advantage is that the fund will have more resources to invest in your company.

Tenure

How long an investor has been with their current fund can make a difference to the investment they bring. However, it is not essential to only look for a well-seasoned venture capitalist with a lot of connections. Remember you are a startup so it could be more practical to work for an investor who is still early in their career but respected. Here it is important to note that the personality of the investor and their compatibility with your company is more important than the age or tenure of the investor.