How to target the right investors for your startup's capital raise

You’re a product visionary. You’ve incorporated customer feedback into your business. Your revenue model is scalable. Your brand is on point and cutting through. Your prototypes and proof of concepts are gaining customer traction. Your metrics are pointing in the right direction.

Now all you need is funding to support your go-to-market.

While we’ve previously explored eight funding options for startups seeking capital, how to find the most suitable venture capital (VC) and angel investors for your startup?

Targeting investors is like targeting customers. Identifying the most suitable investors for your business will allow you to spend your energies appropriately as time is the most valuable asset that founders have.

Experienced investors, be they VCs or angels, will allocate their funds based on an investment thesis, which is an argument or statement about how they’ll deliver returns.

For instance, Giant Angels invests in first-time Australian and New Zealand founders at the seed stage, who are building fintech businesses that leverage opportunities provided by decentralised finance.

In this example, it’s clear that Giant Angels likes backing first-time founders. They have a geographic focus on Australian and New Zealand based businesses. They invest at a seed stage. They are interested in a certain subset of fintech businesses, those that are exposed to decentralised finance.

Having read their thesis, if you had a foodtech startup, it wouldn’t make sense to approach Giant Angels for potential investment, but you’ll have a much better reception if you’re building a new digital wallet to facilitate cryptocurrency transactions.

So how can you create a better list of potential investors?

Geography

If you’re raising capital for the first time into your business, I recommend targeting local investors.

There’ll be more opportunities for you to make a good impression by meeting in person, when circumstances allow. Good local early investors will provide support for your startup, be it introductions to potential customers, advice on growth or suggestions for new hires. They can assist in bringing on investors in your next round, either by introducing you to them or serving as a referee.

When assessing potential investments, I’ve been reassured when an earlier angel investor has spoken positively about how the founding team has dealt with adversity and tough feedback. It’s helpful to have investors with experience in the geographies that your startup is targeting.

Sector

The better you understand the sectors of interest to potential investors, the more you can focus your outreach efforts. Some investors will clearly signpost that they invest in software, hardware, or ecommerce businesses. Others may say they are sector agnostic or invest broadly across the technology spectrum. By targeting investors who are familiar with your sector, you’ll spend less time bringing them up to speed with the latest dynamics in your environment.

Similarly, if you were to engage with investors who are less familiar with your sector, be prepared to provide them with additional context around the market, competitors, and success metrics. Investors with deep expertise in your sector will be more likely to assist in the development and growth of your business as there’s a good chance they can share lessons from their other portfolio companies.

Stage

Investors will have preferences around the stage of business maturity at which they invest. I know of some angel investors who will only invest when a startup raises its first round of external capital. Their investment thesis is to make relatively small investments into a wide range of startups across the region and to assist their portfolio companies with their network of contacts.

Some VCs specialise in investing in a startup’s pre-seed or seed round, while others prefer to invest in series A or B rounds. Later stage VCs may focus on series C or later rounds. Every VC will have their own criteria around stage, which can include level of product market fit, revenue thresholds, number of customers and number of active markets.

While there can be exceptions to every rule, understanding the broad stage preferences of an investor will help you target the more appropriate investors and increase your chances of success.

Reviewing an investor’s previous investments will provide you with guidance on the above. You’ll see the types of startups that have attracted their interest, benchmark your progress against those they’ve backed and identify the sectors where they’ve developed experience. You may also discover that you know founders of companies in an investor’s portfolio who can provide you with valuable introductions.

By better understanding more of your potential investors, you’ll be able to ascertain their fit with your startup and improve the chances of your fundraising efforts.