Portfolio founder: There’s an investor who wants to invest about $500k.
Me: Oh great! Who is he/she?
Portfolio founder: That’s the problem. Person X isn’t well-known. I want “value-add” investors in my round. So, I’m thinking about declining the money.
I have this conversation all the time with portfolio companies. This happens especially when founders start getting a lot of inbound requests from investors to meet, and so they think that they have a lot of investor options. And maybe they do. It’s easy for investors to request meetings, but it’s an investor’s job to meet with lots of entrepreneurs. Let me be clear: this does NOT mean they will necessarily invest. In fact, it is a long road between a first meeting and an investment in many cases — except when there is urgency. Urgency is, essentially, caused by FOMO. If your round has a lot of room in it, even if an investor wants to invest, he/she doesn’t have any incentive to come into your round now because there’ll be opportunity later at the same price. From an investor’s point-of-view, there is no reason to take on more risk now — it is much better to continue waiting for more information until there is the chance that he/she will not be able to invest at this price.
If there’s a no-name investor who wants to join your round AND you don’t yet have any money committed (or limited investment dollars committed), then I strongly recommend taking that deal seriously. Some things to consider:
1. Dollars are always green regardless of who is investing
Money is money. If you have a long way to go in your round, money from anyone is a huge help towards getting to the completion of your round. Even in the rounds that I’ve seen with the biggest names, often there are also no-name investors.
Often, it’s these no-name investors who jumpstarted the best deals in internet history. Most investors like social proof — that you are getting a lot of traction with your round — and no-name investors are often the people who help provide fundraising traction that brings in bigger names later.
2. Don’t confuse no-name investors with being no-help
Not every investor can be famous like Ashton Kutcher. But, there are a lot of no-name investors who are former operators — either at their own startups or at larger tech companies — who would still be value-add from an operational perspective even if they are not household famous. In fact, these are the investors that I personally like best!
That being said, if the prospective investor is not able to provide operational help, that can also be OK. Just providing dollars at the early stages of a round is helpful to jumpstart fundraising traction.
3. Do due diligence on your prospective investors
This leads me to my next point — if you are not familiar with a particular investor, it’s important to do due diligence on him/her. While it’s ok if he/she cannot help you operationally, at the same time, you don’t want him/her to be a pain in your side either. There are a LOT of ways an investor can be a pain in your side. He/she can call you all the time to complain, bug you, and question your decision-making. He/she can be a pain when you need to do your next round. Depending on the rights that you negotiate, he/she can even block the sale of your company or subsequent fundraising rounds. Or if you’re using a convertible note to raise money, he/she could potentially call the note down the road and demand his/her money back plus interest.
So, make sure that your prospective investor doesn’t hurt you. Ask for references — you should speak with existing portfolio founders if it looks like the prospective investor is really serious about signing your deal. You do not need to do this until the conversations get serious – i.e. the investor says he/she wants in your deal.
If you are the first startup he/she has ever invested in, you need to be extra cautious. It doesn’t mean you should decline the investment per se, but you’ll want to make sure that he/she fully understands all the bad things that can happen when investing in startups.
4. Be careful about control
As a follow-on to point #3, you should be careful about how much control your prospective investor has. Will the investor have a board seat? Major investor or information rights? What type of shares and what percentage of your company will he/she have?
If you are bringing in angel investors, this is probably not a conversation you need to have or will have. That being said, there are plenty of places in the world, outside of Silicon Valley, where small investors (including angels) demand a lot of control.
Most of those Techcrunch fundraising stories you read about famous investors listed often exclude the no-name investors who also provided significant money in the round. But hey can be just as important, if not more so.