What are the biggest mistakes made when choosing angel investors and VCs for fundraising?

The biggest mistake you can make as a founder when fundraising between angels and VCs is ignoring the most significant difference between the two groups; VCs are investing someone else’s money. This drives the fundraising process - the documents required, the metrics, the timelines and the diligence. You are not convincing one person, but many along a chain of decision makers.

I googled an angel once, and several articles came up about him being sued for fraud. Even though there were big numbers being talked about, we did not accept his cheque. Definitely do your homework!

First up, don't gloss over the importance of shared values. Make sure your investors vibe with your mission; otherwise, you might hit a snag later. Next, it's not all about the money. Opt for investors who know the ins and outs of your industry. Their expertise can be a game-changer when you're navigating tricky terrain. And, of course, never underestimate the power of due diligence. Take your time; rushing through this step might cost you big time. Happy fundraising!

Doing the homework is not just about searching wide enough to list all the VCs or angels interested to invest in a particular area, but also having a deep understanding of their expectations. This means, do they only invest in second-time founders, or have they invested in similar companies before? Do they have a recent exit, indicating they might have liquidity to invest now? Many of these questions may seem like an insider information that is really hard to extract, but useful databases like Crunchbase can uncover pieces of information to get a better backstage view of the VC. In this way, they will sense you are really serious and take you more seriously in response.

Many Angels are only in it for the name! No intent of investing. One of the angels I was reached out to for my last startup had put very prominently on his LinkedIn profile "Angel Investor in Blockchain & AI". I spoke to him and really got him interested (or at least thats what I thought). Met him and third time to finally ask - what all companies have you invested in? And he said "I am gonna invest soon. I am interested in you!" No prices for guessing that he did not invest and just wasted my time. Here is the learning I got - Beware of wannabes! Ask upfront on their past investments and only invest your time if you see him/her as a serious investor.

Having a clear ask means explicitly declare how much money will safely sustain you until the next important milestone, and how much equity you are willing to give up for it. It is important to provide options, like agreeing to a $300K SAFE at a $2 million post-money valuation, but being open to more investment for a priced equity round. Also, show openness to negotiating terms and conditions, demonstrating you understand favorable terms may actually be more important than valuation.

You must have a clear ask - the amount of money you seek to raise - before you get that question asked. You might say, why not before the meeting? To that my opinion is that all investors, esp. early investors, have a sweet spot for investment and it makes a lot of sense to tailor your ask according to it. Therefore, you either need to research upfront on what that sweet spot is - many investors have this on their website - or just ask this upfront in a meeting, before you get asked on how much you are trying to raise.

A lot of companies raise money from the wrong people for the stage they're at. For example, they raise money from family offices or strategics too early: these investors can be great if they are aware of and willing to shoulder very early-stage risk. Usually they aren't. Another common mistake is to raise money from people you don't know (e.g. crowdfunding) and not managing their expectations. I often hear about tiny investors being the squeaky wheel on the cap table because they were never told that their $1k check won't give them major decision rights in your startup.

Down the road of fundraising, the interested party will need to do a due diligence of your startup. Basically it means fact checking and consulting with experts to evaluate that your claims are legit. However, the very first “due diligence” should be pre-checking that your list of VCs or angel investors actually fits your purpose. For example, if you expect needing 2 more rounds after R&D, are they willing to invest more over time or do they expect a quick exit? Putting in the effort upfront to find investors well-aligned to your needs could increase reply rates and successful first pitch meetings 3x.

This really comes down to trusting your gut. If you aren't feeling it then listen to that feeling and ask yourself why. What is it about this person/company that is off? Usually, investors will be with you for a good few years, and do you want to be interacting with people who don't share your values and vision and be forever justifying, explaining or whatever to get them to see?

A BIG mistake is to take a small cheque from a large fund. This can turn into a nightmare. A friend of mine took a small cheque from a major fund (Top 3) as part of a program where they were investing in 'promising startups'. Now most of these investments are done without much tought by these funds and is only to keep track of these startups. They put what is called as 'play money'. But this can be a major challenge for the startup later. For my friend in their subsequent round, other funds would start by saying - "Hey, you have X (fund) on your captable, why are they not investing." Its a poison pill. Avoid it at all cost. If they want to invest, let them put serious money or else engage sometime later.

Relationships should be built at least 6 months before formal fundraising begins through recurring monthly updates on progress to interested parties. Many initial pre-seed investments come simply from showing consistent progress updates on platforms like Product Hunt. These relationships should continue post-investment as an obligation for the next round. Even if early investors don't join the next round, maintain communication so they happily vouch for you to their networks.

Fundraising is a seasonal job, relationship building is a full time job! Its a founder's job to invest his/her time in building relationships with the right investors. Most ideas take time to mature - as a business and also amongst the investors. And for that to happen you need to build relationships which will allow you the opportunity to grow your business idea on the investor. Like any regular sale - most people dont buy stuff the first time they hear about it, but when they hear it enough time, the odds of converting increase. This is exactly true for investors as well. So, get going with they slow process of relationship building!

The most important element showing your readiness is preparing a solid data room covering all aspects: 1) Past traction, 2) Legal documents 3) Pitch deck and financial model 4) Business plan (concept and financials) 5) Go-to-market strategy document 6) Action plan to next milestone 7) Cap table and key team agreements 8) Market traction. Covering the past, present and future this way builds investor confidence in your idea and team.

A founder is alwaaaays ready with his pitch! You never know when you find that moment to shine. And pitch of all lengths - 2min, 5min or 20 mins. This is specially true in the time leading into your fundraise. You know what are your strong points. How do you focus on that and awe you listener. Now, you business at all times will have pieces which are broken, but that should not prevent you from telling a compelling story.

Angel investors and venture capitalists are not the only source of funding. Their interest is in obtaining a return on their investment (ROI). All good, but your projected returns may not be high enough or risk free enough to gain their investment. There are other investor candidates - stakeholders - who stand to gain from your success without investing. This means their self-interest is higher and more bespoke than an investor seeking only ROI.