Finance

Five Attributes to Look for in Early-Stage Investors

Said Gutseriev | 9 May 2022 | 2 years ago

Last year proved good for investing despite the uncertainties of the pandemic. UK government figures show that tech start-ups and scaleups received a record-breaking £29.4bn in funding during 2021, up from £11.5bn in 2020. However, increased funding does not mean that the initial “match-making” step of pairing start-ups with the right investors has become any easier.

It is an established fact that early-stage investing carries inherent risks for investors, but less attention is paid to the equal share of risk taken on by start-ups. Finding the right investor can be the difference between success and failure, so there is a lot to consider when selecting who to invite onboard. 

Here are five attributes that start-ups should look for in early investors:

Patience and flexibility 

The best investors have a long-term outlook. Unwilling to sacrifice future benefits in favour of short-term gains, they will encourage continued investment in growth and development, even if this means not turning a profit for several years. 

You should seek investors that are calm, open, and willing to learn new things. Avoid anyone who is narrow-minded, focused entirely on short-term results, or determined to impose their ideas on your company without considering alternative approaches. 

  1. Strong principles of governance
At the concept and pre-seed investment stages, it is important to set up good governance processes. This includes establishing strong company policies, accurately preparing accounts, and filing financial statements. Without these processes in place, it is very difficult to move to later funding rounds. 

You should look for investors who can help you consolidate and standardise your company’s management. Anyone with previous experience setting up governance processes would be a boon at this stage of business development.

2. Connections

Hiring staff is essential for growing a start-up, but it can be challenging to find the right people to meet your business needs. Furthermore, hiring the wrong people can have a very negative impact on performance and team morale. 

At this stage, having an investor with connections you can leverage pays dividends – even better if they take an active interest in recruitment and use their experience to help you vet candidates. Your investor’s network can also help you find everything from advisors through to your first clients, so it is always worth looking for well-connected people. 

3. Interest in going the distance

It is normal for start-ups to pass through several rounds of growth and investment before they reach the IPO stage. The process takes years and is far from straightforward. Therefore, look for investors with a track record of sticking with the same company through several funding stages, as they will be able to advise you on how to navigate the process. 

As you progress through the rounds, your goal should be to make your business profitable. This might require making some hard decisions regarding business consolidation and priorities – areas an experienced investor can also provide advice on if necessary. 

4. Sufficiently deep pockets

In an ideal world, early-stage investors would support your business every step of the way, continuing to invest in each funding round from the concept stage through to IPO. However, such deep commitment requires equally deep pockets and is thus rarely achievable. 

As candid as it might sound, you should look for investors that have a suitable amount of capital, giving them the ability to keep investing in the company through seed rounds, with the potential of investing in later rounds as well. A willingness to lose money in the short term in the hopes of reaping the benefits later is also a desirable attribute.

Final words of advice

Despite the focus on number-crunching, investing is often more of an art than a science, involving a lot of relationship-building and management skills. Partnerships between investors and start-ups should be equally rewarding for both parties, with both sides cooperating for the benefit of all. Given how important early-stage investors can be for the success of a business, it is always worth ensuring that everyone is happy with the relationship before any paperwork gets signed.

Topic

Finance

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