Investor Evaluation Framework

Updated: Apr 18, 2020

The art of managing investors is like a sales process. As a salesman has to qualify a prospect for selling their product, Investor outreach also requires prudence to qualify an investor to ensure that effort is placed at right touch point. The points below provide a framework to evaluate and map the investors where founders can reasonable expect to close a deal:


Funding availability:


At any given moment, about one in eight VC firms have finished invested one fund and are in the process of raising the next one. An unknown number of private investors or family offices are waiting for a ‘liquidity event’ to produce money before they will be ready to make their next investment. It’s so obvious that it’s banal, but people who don’t have money right now, aren’t going to take part in your round. If you’re delicate, you can probe for this.


Investment Cycle:


Many family offices and angel investors have plenty of cash on hand, but right now they’re meeting companies to learn about the industry or just to keep up to date. While they might invest if they come across something astounding, it’s not a good sign if they can’t tell you how many new investments they plan to make in the coming year, for instance.


Timeline:


Everyone except crowdfunding investors spends some time trying to understand your business before they come to a decision. For a PE firm, that might be 100 work hours; for a VC, more like ten; for an angel, maybe 2–3. And then they’ll need time to produce a term sheet, if they’re a VC, or review someone else’s term sheet if they’re a follower, and then either read the final investment docs or find a lawyer to look at them. Someone who’s about to go on a two-month vacation, or who’s going through a divorce or starting a new job at the top of a bank, isn’t likely to have time. If you pressure them later in the process, they may then drop out, spreading FUD and wreaking havoc among the other investors. So you need to discuss in detail what due diligence they’ll need to do, and how ready their lawyers are, so that they can commit to a timeline but be fully informed before they do so.


Sectoral Preference:


Some investors are truly global, and happy to wire money to people they’ve never met and receive updates only by email, others follow the principle of Arthur Rock, the VC who gave Intel its seed funding. Rock had a firm rule never to invest in a company more than forty minutes’ drive from his house in Silicon Valley. You can figure out which type any given investor is by looking at their portfolio. An investor who’s in scope on the other criteria may still be an unlikely prospect for you if they’re geographically constrained, but they may not tell you. They may be taking the meeting because they’re researching the space, or because they’re considering an investment in one of your competitors closer to them.


Ticket Size:


The ‘ticket’ is the amount that a VC invests  and it’s important to be aware that no matter how much an investor likes you, professionals who are deploying money on behalf of institutions usually have a defined set of deal criteria. If your ask is outside their range, either way too small or way too high, the deal won’t happen. Talking to them is a waste of breath.


Stage:


This differs from ticket size, because the amount of money that makes them the lead investor in one round will make them at best a follower in the next. Many VCs are willing to do a smaller ticket one round earlier than their typical sweet spot in order to see how the company performs so that they’ll have an advantage over other funds when it comes to the serious investment they hope to make, and so your business may be at the right stage even if it doesn’t superficially look like it. But if an investor typically wants to see $3m in ARR, and you’ve got $500K, then your meeting with them isn’t likely to lead to money any time soon.


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