Despite an uptick in venture capital investments in Q1 of 2024, the fundraising climate continues to be challenging as the great reset continues from the hysteria that peaked in 2021. As deals continue to happen more slowly than in the previous decade and the bar for what investors look for at these stages has changed, raising startup capital across stages remains arduous. In light of this, founders focus on doing several things: i.) stretching their runway through cost-cutting and other measures, ii.) prioritizing revenue generation, iii.) turning to debt and other capital options (where possible), and iv.) optimizing the fundraising process to increase the odds of success. For this article, we’ll focus on the last of these for those who continue to beat the pavement to secure that next round of funding.
We widely recognize that fundraising is just another form of sales. It has many inputs and stages in the process, and to optimize it we can look at each of these factors to improve the probability of success. For inputs, one of the most impactful ones is who founders choose to reach out to or with whom they spend their time. This is a perfect case for “garbage in, garbage out.” Spending additional time researching the right target investor list can pay back in spades, but how do you do it? We look to share tips on how best to craft an effective target investor list, which can help to meet the challenges of today’s tough fundraising environment.
Amassing an Unvetted Target Investor List
Some may prefer to build a list from the bottom up, cherry-picking the right investors one by one, but this can hinder progress. It’s often better to start by casting a wide net and narrowing it from there. The good news is that there are many platforms and lists out there that can help in amassing and even filtering through these.
In terms of numbers, we recommend starting with an extremely wide net on the order of 600 -1000+. We’ll want to narrow this down by about half throughout vetting the best target investor. Again, as with any sales process, the better you target your outreach, the higher the probability of success.
Here are a few resources in no particular order for getting a solid list of top-of-funnel venture firms and investors:
- Crunchbase: Great information on funding rounds with some hubs/lists around thematic investing e.g. verticals, geographies, etc. Free and paid versions ($29 – $99/user/mo).
- VC Sheet: Curated lists and filters to narrow down potential investors by check size, stage, vertical, and geography. Free.
- Signal NFX: Community-driven tool to find investors based on sector, stage and quality. Includes connection information. Free.
- Open VC: Access an investor list, a fundraising CRM, and a deck hosting solution. Free and paid versions ($99/month or $288/year).
Of course, there are also Pitchbook and CB Insights. Those require hefty subscription fees, so we’ve highlighted the more startup budget-friendly ones above.
Qualifying Potential Investors
Qualifying investors is the part that gets hard and time-consuming. You should consider several factors to know whether an investor is a potential “good fit.” Some are centered more around the mechanics of the opportunity (stage, check size, etc.), others on the alignment of their investment approach, and others still on less concrete factors (proximity/location, shared experience, etc.) Below is a list of many important ones and how to get information on them:
Assessing Fit by Round Mechanics:
- Stage of investment: Does the firm make pre-seed, Seed, Series A, etc. investments? The company website is a starting point. A layer deeper could be to examine investment history e.g. those on Crunchbase to see what investments they’ve made recently. A note of caution that just because an investor may have invested at Series A, it may not be their initial check, go back in history to make sure this is not a follow-on investment.
- Size of round: Beyond the stage, it’s good to also find alignment in the size of the rounds in which investors participate. You can safely assume that if it’s a large fund, they’re more than likely writing bigger checks and will therefore participate in larger rounds. So if you’re raising a $1M Seed, it’s likely not a great idea to prioritize an investor who typically invests in $20M Seed rounds. Again this is a data point you can find on Crunchbase and recent announcements by the firm. Average check size is often listed in many areas from the firm’s website to listing sites like NFX Signal and Open VC. This a great way to assess fit to your round.
- Active: Are they actively deploying? This can be tricky to discern as not all investments are disclosed publicly immediately. That said, you can review when the last investments were announced to try to prioritize those you have confidence are currently deploying. Another tip is to see when the firm raised its last fund. If they are within 2–3 years of that date, it’s a safe bet that they are still deploying initial checks from that fund.
- Have they led rounds: This one is not as important as the ones above and can be even harder to determine. Nonetheless, at different points in your raise, you’ll want to prioritize funds that can lead a round versus those that predominantly follow. It’s good to gather this datapoint, so you can stagger your outreach for the various types of investors and hopefully align the timing of when you receive competing term sheets.
Assessing Fit by Investment Approach:
- Vertical: Do they invest in your industry? Again, this is an area to assess what they say and what they do. The website (specifically the portfolio page, if there are categories), will highlight the primary verticals in which the firm invests. You can also look at historical investments, especially recent ones, to see where the firm invests. This is a good time to also look out for if they’ve invested in an active competitor. Most funds will typically not stack these competitive investments, so best to prioritize those that don’t have a competitive investment in the portfolio. If the competitor has exited or closed its doors, then that target is fully in play; even better if there was a good outcome!
- Similar companies / tangential spaces: As mentioned above, you likely want to avoid investors that have already invested in an active competitor, but finding ones that have invested in tangential spaces is a great place to assess alignment. For example, if you are a diagnostics company in healthcare for a specific disease then approaching investors that have invested in other diagnostics companies, health improvement software, or therapies supporting that specific disease indicate good targets.
Assessing Fit by Other Intangibles
- Proximity/Location: Local ties, whether by city, state, region, or country, can be a good grouping, particularly if those investors possess an overlap geographically in the portfolio.
- Relatability/Shared Experience: Everyone speaks about building relationships and trust through the fundraising or sales process. This is not to be overlooked. Ultimately, each investment has to be established on knowing the founding/executive team and trusting. Therefore, if you’re able to start on common ground, it can be a great foundation. Read about potential investors, their interests and associations; you may discover a perfect place to build a connection.
Keeping Track of It All
As mentioned in a previous article on fundraising, How to Find Angel Investors Ultimate Guide, there are many ways to keep track of your investor list and outreach. These range from spreadsheets to customer relationship management (CRM) software like HubSpot or Attio. Here’s a great Airtable template for fundraising that tracks contacts, firms, and interactions (meetings, etc.).
We’ll cover the fundraising mechanics in a future post. Until then, happy vetting!