First Principles Fundraising #3

In our “First Principles Fundraising” series, we’ve walked through the critical decision points founders face in their fundraising journey.

The first article delved into whether raising investment is the right choice for your startup. It explored the pros, cons, and expectations of securing venture capital, helping founders assess if outside funding aligns with their growth strategy. The second article focused on understanding your investment readiness. It examined how to leverage key milestones, risk-return dynamics, and growth potential to build a compelling pitch that appeals to venture capitalists.

Now, in this third article, we shift to identifying and reaching out to the right investors. This is often trickier than it seems, and a well-considered strategy can save you valuable time and effort.

How to Choose the Right Investor: A Dual Approach

When it comes to selecting the right investors, you can approach it from two complementary angles: bottom-up and top-down. Both approaches have their merits, and combining them can significantly increase your chances of securing the ideal investment partner.

Bottom-Up Approach: Systematically Building and Filtering a List

The bottom-up approach starts with casting a wide net to gather a comprehensive list of potential investors. This involves leveraging online databases, LinkedIn, and other resources to compile a roster of venture capital firms. However, having a large list is only the beginning. The real challenge is in filtering that list down to those VCs who are most likely to be a strong fit for your startup. Here’s how to filter your list effectively:

1. Filter by Stage

The first step in narrowing down your list is understanding where your company stands in its development cycle:

  • Pre-Seed: You’re a small team with a compelling idea, but you don’t yet have a market-ready product.
  • Seed: You have developed to the extent that you can gather early validation from customers, through revenue or similarly strong commitments.
  • Series A: You’ve achieved product-market fit and are able to scale in a repeatable and consistent manner

Different venture capital firms specialize in different stages. Identifying investors aligned with your current stage is crucial, as they bring the relevant expertise and resources to help you navigate your specific challenges.

2. Filter by Sector or Investment Thesis

Next, consider the sector focus or investment thesis of each firm:

  • Some VCs are generalists, willing to invest across various sectors (e.g., SaaS, fintech, clean tech).
  • Others have a niche focus (e.g., AI, health tech, or sustainability). Aligning your pitch with a VC’s sector specialization increases your chances of securing funding.
  • Beyond sectors, some firms invest based on a thesis about the future. If your startup aligns with their vision, highlight this alignment in your outreach to strengthen your pitch.

3. Filter by Check Size and Lead Role

Understanding the check size a VC can write is vital:

  • For large seed rounds or Series A, you may want a lead investor—a firm that can take on a large portion of your round and guide the terms. These investors often carry the due diligence burden for other participants.
  • If you’re raising a smaller pre-seed round, a lead investor may not be necessary, and you can close your round with smaller checks from several investors.

Note that even large firms might refrain from leading if they’re at the end of a fund’s life cycle, as they might lack sufficient capital to take on new, high-stakes investments. Always check when a VC’s fund was last raised to ensure they’re actively deploying capital.

4. Filter by Synergies with Portfolio Companies

Once you’ve filtered by stage, sector, and check size, look for potential synergies with a VC’s existing portfolio:

Investors are more likely to be interested if your startup complements their current investments. This can create opportunities for collaboration and co-selling with their portfolio companies. Understanding their portfolio also shows that you’ve done your homework, enhancing your credibility during the pitch process.

Top-Down Approach: Building Relationships Before You Need Capital

In contrast to the systematic bottom-up approach, the top-down approach focuses on identifying investors who align with your values and vision. This method is about quality over quantity and relies heavily on networking and relationship-building:

1. Follow and Engage on Social Media

Start by following investors on social media platforms like LinkedIn and X. Look for VCs who:

  • Share insights and opinions on topics relevant to your industry or niche.
  • Align with your startup’s mission and values.
  • Have shown a keen interest in the kind of technology or vertical you’re working on.

This approach requires time and patience. By consistently engaging with their content and building rapport, you can get a sense of their expectations, values, and investment preferences. It also allows you to get on their radar well before you initiate a fundraising round.

2. Qualitative Factors and Reputation

Beyond the technical aspects, consider qualitative factors like the investor’s reputation, communication style, and willingness to support founders during tough times. You want investors who will not only fund you but also act as trusted partners through your growth journey.

3. Pattern of similar investments

Another effective top-down tactic is to identify investors who have recently backed startups similar to yours in stage, sector, and focus. This approach helps ensure you’re targeting investors who are actively deploying capital. If you’re able to speak to the founder directly, you can also gain valuable insights into the investor’s process and support style, ensuring you approach those who are not only aligned with your needs but also a strong fit as long-term partners.

Combining the Two Approaches

The ideal strategy is typically to pursue both approaches. The bottom-up approach is scalable and efficient for reaching a broader audience, while the top-down approach is more targeted and relationship-driven. Depending on your startup’s runway and urgency, you might lean more heavily on one approach than the other. If you have the luxury of a long runway or even positive cash flow, you may want to prioritise finding the best possible partner to work with. Most of the time, you’ll probably just need capital with reasonable terms and without creating too much of a distraction from building your company.

In today’s market, where venture capital activity has slowed down, it’s more important than ever to be strategic with your outreach:

  • Avoid wasting time on investors who don’t fit your stage, sector, or investment requirements.
  • Be cautious of firms that may appear active but lack the capital to invest due to depleted funds. This is particularly common among smaller VCs who raised capital in the boom years of 2021 and are now struggling to secure new funds.

Ultimately, the goal is to find not just any investor, but the right investor—one who aligns with your company’s vision, understands your market, and can support you beyond simply writing a check.