Monday 17 May 2010

Evaluating Investors

Coins and banknotes, two of the most common ph...
Founders often put themselves in a disadvantageous position trying to be as appealing to investors as possible. We all do it and it's nothing to be ashamed off. It's a natural inclination when fishing for money. However there it's no excuse not to step back and think  rationally about which investors to invite in your business.

Here is my formula, how to evaluate investors:

A*(reputation) + B*(network) + C*(experience)

Investor's reputation is important since it brings a huge validation in the community. If your investors are well known and respected in the markets where you operate, it can give you a necessary advantage against competition. It's also hugely important when working on the next fundraising rounds. A good investor can reduce a fundraising cycle significantly, since other investors will want to coinvest.

Investor's network is crucial if you're dependent on partners. And you usually are. When we started Zemanta we knew nobody in UK nor in US. It was through leveraging our investor's networks where we could get to almost anybody we needed. It was crucial for us. Obviously if you have a good network, you don't need to "buy" it from your investors.

Investor's experience can be valuable resource and a free pool of advice if you can work with experienced investors that worked with other startups or are former entrepreneurs in your space. You can hardly buy such experience unless you hire an experienced CEO which is going to be costly.

It's important that you think through what you need and what you want. Higher offer can quite diminish in value if one investor brings no network or is unknown. Particularly if your're an unknown startup with no network.

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