How to choose your startup investors

I’ve been lucky enough to raise $50M from great angels and VCs for my company Liblab. During this journey (and previous companies I started) I've learned what to do and who to avoid when raising capital for your startup. This is my attempt to give some tips for future founders.

There are many articles for investors on how to choose founders to invest in, but investing in a startup is a two-way street. Investors try to choose the right founders, and founders need to be careful about which investors they choose. Investor-founder conflicts are more common than you think and can be a significant reason for startup failures.

Choosing investors is a big decision and usually a one-way door. Once you have an investor in your cap table, they will stay there for a long time, probably even after you as a founder.

I am aware that sometimes beggars can't be choosers and if you must have an investment to survive, this article may not be useful. But in most cases, you will have the option to decide between different investors in each round.

Investors' value is not measured on a 0-10 range where 0 means no value and 10 means a lot of value. investor value has a -10 to 10 range, where -10 means they hurt your business. There are a lot of horror stories about investors who’ve created a toxic dynamic in their portfolio companies. Avoid these investors at all costs.

What do you need from your investor?

Before you start looking for investors, you should clearly define what you need from them. This includes the amount of funding you require, the type of investment, and the terms of the deal. Are you looking for domain experts? Do you need a PR push? Are you looking for help with hiring? Or are you simply looking for people to leave you alone to do your thing? Different investors will have different value-adds. Investors will usually pitch you any of these reasons to choose them:

• Hiring - some investors will have built-in hiring agencies or recruiters who can help you find talent within their network. Make sure you validate this by asking for examples of the available talent they’ve recently placed. Is it a junior engineer? Is it a veteran COO?
• PR and marketing - investors are well connected to journalists and publishers and can spread the word about your startup faster. Ask them for examples of recent articles or campaigns they've run.
• Go-to-market, sales, and strategy - investors can help you launch your startup or expand to a new vertical. They usually have in-house advisors who support their founders. Ask them for an example of how they can help your use case. You might even get some good advice.
• Customers and design partners - larger investors will offer you a connection to their portfolio companies. This can be a great value for lead generation. Make sure you choose investors in a domain that is relevant to you. If you’re a classic B2B SaaS company, don’t go with investors who invest in consumer gaming companies.
• Connections - this is a very vague value, but investors will like to offer you an introduction to anyone they know. Do your homework, and make sure they know people you actually want to be connected with. Another form of connection is between the portfolio companies. Investors in your domain will have portfolio companies in your domain to connect you with. YC is known for connecting founders together to collaborate and support each other. This internal network can provide value when you need advice or share resources.

On top of these options, there’s a difference between investors in different stages. In the early days, your investors might be angels who write smaller checks ($10k-$500k) and operate individually or as part of a syndicate. Their main value is their own time and knowledge. They are more open to rolling up their sleeves and tackling problems with you. Late-stage investors are usually traditional VCs, they have a well-working machine, and you are one of many companies they have in their portfolio. Their value is their reputation and connections.

Signals to look for when evaluating potential investors

• Referrals: this is one of the most important signals you can have. Ask for referrals and call them to get an understanding of the investor's strengths and weaknesses. Also, talk with other founders in their portfolios. 100% of the time, the referrals only say good things, that’s why they choose them. Ask questions like “can you give me an example of something that they can do better?”. The best signal you will get from founders of companies that failed. Statistically speaking, your startup will fail, so gather information about what the investor does when things are not going well.
• Moving too fast: Be wary of investors who present a term sheet without understanding the problem, market, and solution. They may have other reasons for deploying capital so fast.
• Moving too slow: Watch out for investors who keep asking for more meetings or dragging their feet for months. A typical process usually has a first meeting with an analyst/VP/associate/principal, a second meeting with a director, and a third meeting with a GP. Suggestions like “let’s review your progress in a month” are their way of saying no while keeping you in their "friend zone”.
• Ghosting: If an investor stops communicating with you, cross them off your list. Never raise funds from investors who drop the ball in communicating with founders.

By following these steps, you can increase the chances of finding an investor who is a good fit for your startup and will help you achieve your business goals. Not that you have the money, the real game begins.