In a given raise process, the type of investors that founders pursue varies broadly based on the context of the round. Are you looking to raise on the back of sustained growth and traction, or are you yet to see traction? Are you looking for a lead investor, or are you instead seeking a party round with a lot of small investors?
In the below post, we explain how founders can go about forming an empirical criteria to zoom in on the right type of investors for the round.
Example Scenario
For purposes of the below example, let's assume that the founder is raising a $12m Series A round for a "Buy Now, Pay Later" company that operates in the Fintech sector and is based in the US. In this specific scenario, the founder will need a lead investor to put the round together.
- Geography:
- Criteria: Investors that have made at least 10% of their total investments in the US
- Rationale: The above criteria helps limit our focus to investors that are focused on the US
- Stage:
- Criteria: Have made at least 15%+ of their total investments at Series A
- Rationale: Limits our focus to investors that truly specialise at Series A
- Sector:
- Criteria: Have made at least "3" investments in Fintech
- Rationale: Limits our focus to investors that are at least familiar with Fintech
- Inclination to Lead:
- Criteria: Have led at least 10% of their total investments
- Rationale: Limits focus on investors that have the capacity and the inclination to lead rounds
- Fund Size
- Criteria: Have a minimum fund size of $250m
- Rationale: Limits focus on investors that have the capacity to write $3m+ lead checks
Conceptually, founders should distinguish between attributes that serve as qualifications versus ones that work as disqualifications. The above list shows a list of factors that should serve as disqualifications. If an investor does not meet the above criteria, then they probably should not be on our target list. The specific thresholds can be adjusted based on our preferred levels of flexibility or rigidity.
After closely observing thousands of raise processes, we find that a vast majority of founders end up targeting and pursuing investors that aren't a great fit for their Company. In the absence of a data-driven process, it can be challenging to identify the right investors.
On the contrary, targeting the right investors leads to:
- Improvements in conversion rates from first to second calls,
- High-context and high-fidelity conversations,
- Higher probability of actually closing (versus just talking to investors).
It takes time and effort to take a super targeted approach (versus just getting on calls with whichever investors can be easily accessed). At Metal, we view the time and effort invested on this front as the highest leverage activity in a raise process.
