Finding A Lead Investor

One of the hardest things for company founders that are on the verge of validating a scalable business model is the question of how and where to find the right first investor.

As an investor, coming into a company without a validated model, and often with no or very little revenue is a hard thing too. Especially if the founders are first-timers, which happens often in areas that aren’t major technology hubs. There is a reason we use terms like “angel” investor or “seed” fund; the investment activity at this stage is more akin to charity, or to watering a seed without knowing if a sprout will ever come out, let alone if it will grow into a lush, fruit-bearing tree. Many things can happen on the way to getting there, wrecking the process.

Now, as I mentioned last time, there is no shortage of super-early-stage capital in and around Europe: in one year alone, more than 1,500 startups got nearly EUR 40m in first seed investments from nearly 200 accelerator programs and seed funds across the Old World. These funding opportunities are often a great mechanism for first-time founders to come to grips with the basics of venture entrepreneurship, like building a business model (canvas), or understanding how to pitch a startup story to an audience of tech aficionados.

Experience shows however, that these two hundred or so investment organizations are mostly useful with basics, but can’t offer much help after the first product version is built and the first revenue starts to come in. What to do now? How to get access to strategic distribution channels? Where to get specific domain expertise on marketing and sales? How to price a product and retain users?

Over the years, I have worked with hundreds of founders, mentoring at 20 or so acceleration and incubation programs, and I’ve found myself often repeating the same mantra to the founders I was meeting: a variation on the famous startup adage of ask for money, and you’ll get advice, but ask for advice, and you might find yourself talking to your first investor.

This week I had the pleasure of talking to an ambitious first-time founder, who is working on an interesting product in the CRM workflow automation domain. We got introduced by his first seed investor, and while we were talking, I told the founder to implement the process that some of my friends mockingly call the “Max 100”: compiling and validating a list of (up to) 100 names of business people who had been through a similar stage in a similar vertical with their company, and ended up getting acquired.

The process is straightforward, and from among at least 50 fundraising stories that I witnessed first-hand, is probably the most reliable and sure way to get a great lead investor for the first (post-MVP) investment round. For the sake of the story, I will use the already mentioned example of the CRM workflow automation company.

Here you are, the founder of an interesting B2B technology company that allows enterprise clients to automate their CRM workflows without ever touching a line of code. You raised a bit of cash from a savvy local fund, built a first product, and have started trials with 10 or so clients, with the first 50-100 USD per month subscriptions starting to bring tiny little revenue. The following is a way to build a network among the leading individuals in the CRM automation domain.

1. Start making a list of companies that did a similar product, in a similar niche or market. Just a Google search on “CRM workflow automation” yields a number of companies, like Zoho, Salesboom, Lithium, Sage Software, and Get Satisfaction.
2. Entering the above names in Crunchbase immediately shows that Get Satisfaction got acquired by Sprinklr, and that Sage Software recently acquired PAI Group. Dozens of other results show up based on our Google results. For the sake of brevity, let’s stick with Get Satisfaction and Lithium.
3. Another great resource is VBProfiles.com. Here we check both Lithium and Get Satisfaction for “Related Companies”, yielding us list of names of other startups and larger companies in the same domain.
4. Going back to Crunchbase, we start looking at the individuals behind the companies; the founding team, the angel investors, the partners of the VC funds that participated in the funding rounds or buyouts.
5. In an empty spreadsheet, we note the names, qualifying them as founder/angel/VC/adviser/executive, etc
6. Last and final step is to start seeing how we are connected with the names in our spreadsheet. LinkedIn and Angel List are great professional networks to determine professional proximity to people. Just this random search for operators in the CRM workflow automation domain gave me more six second connections and one first.
7. Armed with a list of people whom I want to connect to, and with several names that can connect them to me, I start making intro requests, aiming for phone calls to ask for advice and guidance to the people in my extended network who were part of the Get Satisfaction and PAI Group exits.

Deals usually don’t happen over e-mail and skype, and building relationships with these newfound advisors will inevitably require traveling to see them, meeting them at conferences, and generally spending enough time together to gain trust, which eventually may lead to an investment offer from an advisor that happens to be an angel investor or VC partner.

But when looking to find the best lead investor, one who can immediately spot the weaknesses of a prototype and who would be willing to stand behind the founder with their entire reputation, giving the company access to their rolodex and hard-earned experience, than this is a great way to do it.

I’ve seen dozens of early-stage company founders build their initial network out of nothing in this way, paving a way to closing a financing round with a great lineup of investors, who commit based on a solid first commitment from a reputable lead investor.

At Cross Border Angels, we are committed to helping the best entrepreneurs around the world connect with the most useful angel investors. Learn more at https://crossborderangels.com/entrepreneurs.

This article first appeared on Cross Border Angels blog:https://blog.crossborderangels.com.