NEW YORK, United States — Last month, in Part 3 of this series, I wrote about the importance of putting together a good business plan to focus your company and drive the fundraising process. But just as critical as building a good plan is finding good investors to read it and put money into your business.
Raising money is a two-way street. You need to make yourself attractive to investors, but you also need to select investors who are right for you. Of course, based on your business concept, industry experience and relationships — as well as where you live and the macroeconomic climate — you may be forced to take money wherever you can find it. But nonetheless, you need to understand that there are many types investors with different interests and motivations and a wide range of resources, track records, expertise, relationships and reputations.
1. A RANGE OF INVESTOR TYPES
When you start fundraising for an early stage business, you need to be clear about exactly what you are looking for from a potential investor and why. Key investor types include friends and family, professional angel investors, venture capitalists (VCs) and strategic investors. And each type offers specific advantages and usually invests at a specific stage of a company’s lifecycle.
Today, Moda Operandi (M’O) has approximately 20 different investors of various types. But the sequencing of our investors was somewhat atypical. VCs like New Atlantic Ventures came in ahead of angels, while strategics, including Condé Nast, IMG and LVMH, invested earlier in the lifecycle of our business than we had anticipated.
Friends and family: As the name suggests, they are your friends and family members who invest because they love you. F&Fs typically invest the earliest stage of the venture. They probably don’t have industry expertise and don’t want to be particularly involved. For M’O, my co-founder Lauren Santo Domingo and I raised a small seed round from F&Fs in June 2010. This allowed us to get a small office space, mock up some site designs and start putting key contracts in place. But on a parallel track, we started meeting with VCs and strategic investors. We were on a mission to launch fast and therefore kept several balls in the air.
Professional angels: These are individual investors who make regular investments in businesses and often bring deep industry expertise or relationships to the table. They are typically investing for themselves and aren’t bound by the bureaucracy or exit pressure that can burden other investors. They can be very passionate and hands-on, adding real value to the mix. While professional angels didn’t invest in our seed or Series A rounds, surprisingly, they took part in our Series B and C.
VCs: These are professional investment firms who help companies grow and then divest to achieve a maximum financial return. Many partners at VC firms are former entrepreneurs themselves or have worked with enough entrepreneurs to know how to predict success and failure. While VCs bring immediate credibility to a company, they are under extreme pressure to maximise short-term value so that they can exit and realise their return. One of my early investors told me: “VCs have a herd mentality. They want to get what everyone else wants to get. The key driver for them is to not lose out to their competition.” Indeed, by our Series C, this became clear. The round was greatly oversubscribed, meaning there was too much interest, and not all members of the herd made it. But the VC we picked to lead the round demonstrated an ability to lead rather than follow. They liked us for us, not just because other investors showed interest.
Strategic investors: Strategics are investors you engage not just for money but for the non-cash synergies and resources they bring to the table, for example, industry expertise, infrastructure and relationships. Importantly, they are investing, not just for the money they hope to make, but because the product or service you provide compliments their existing business. As a result, strategics are often deeply involved in your operations. Usually a strategic investor will join at a later stage, when your business is up and humming. And in many cases, a strategic will be the company that eventually acquires your business. Of course, strategic investors often don’t want their competitors investing or working with your company, so you have to be careful about whom to ally with. At M’O, Condé Nast was an early strategic investor that saw synergies between our business and their Vogue property. Later, LVMH and IMG invested, as several of the brands we sell on the site are owned by LVMH or hold fashion shows managed by IMG.
2. WHAT MAKES A GOOD INVESTOR?
Looking good on paper: When reviewing potential investors, key criteria to consider include reputation, their previous investments and the size of their fund.
• Reputation: It really matters. Being backed by an investor with a good reputation will get you far. Doors will open, while certain questions will remain unasked. M’O was lucky to have had top tier investor NEA Ventures join our Series B round. And when it comes to luxury fashion, LVMH is pretty much as premier as it gets. But do all of the investors in your business need to be well established? Certainly not. If a less established investor better understands you and your vision, it may be able to do more for your business than an A-list investor.
• Track record: Investors with a good track record not only have a good eye for spotting business opportunities, but they will most likely be able to offer you the most value over time. But do your research and target those investors that have been successful with businesses like yours.
• Financial resources: Ideally, you’d like your investors to be able to back you as you grow and require more money. This is particularly important if you need to raise additional money in a tough financial climate. Size matters. Ask how big the fund is.
• Industry expertise: The importance of an investor with deep industry expertise depends significantly on the existing skill sets of your executive team. While most financial investors lack specialised industry expertise, they often have broader sector experience they can bring to bear. But here, strategics are critical, as they have the unique ability to add real industry-specific expertise and credibility to your team.
• Quality relationships: The relationships an investor brings to the table are crucial, whether they include potential customers, vendors, partners or additional sources of financing. It’s important to understand the strength of an investor’s network and their willingness to use it. While Lauren and I have strong industry relationships, we have benefited from many useful relationships that our investors have brought to the table. Also, since financial investors are constantly looking at new business concepts, they can often introduce you to new ideas, companies and people that you may not otherwise come across for many months.
Shared values and objectives: Feeling out your alignment with an potential investor on values and objectives is critical.
• Values: Do you share general values with your investors when doing business? Personally, I have a “no asshole” rule when it comes to working with people. In addition to other positive attributes, one of the investors who joined our last round was inspiring due to his particularly graceful and amicable approach to doing business.
• Vision: A common vision for the business is critical. If it isn’t there, walk away. One of the potential investors we met during our Series B round suggested we start selling discounted old merchandise on our site. Next. Another investor suggested we start manufacturing clothing in China for all of the brands that we work with. Check, please!
• Exit: Weigh the timeline and pressure your investor will face in terms of cashing out. Are you guys in line? If not, you may have a serious looming problem.
Then there is the magic: Just like in dating, the chemistry needs to be there. This is perhaps the hardest element to find and you can, of course, live without it. But if the magic is there — that intangible je ne sais quoi that inspires you to work with this person — you are likely to have more fun building a company with a fruitful outcome for everybody. I feel fortunate to have a couple of investors on my roster who fall into this category. They help me to build a better business with a smile on my face. When you find these kinds of investors, hold on tight. If you play your chips right, you may have them investing with you for life.
But ultimately, of course, the terms of any deal matter a ton. You can find an investor who ticks all the boxes above, but then lays a mediocre offer on the table. More often that not, however, a good investor who sees things your way puts good terms on the table. They, too, are focused on building a bigger and better business, not rushing to bake and sell a smaller pie.
Previous articles in the Finding Your MO series:
Áslaug Magnúsdóttir is co-founder and former CEO of Moda Operandi.