How to choose an investor

How do you choose an investor for your startup? Choosing an investor should be approached very carefully and thoughtfully. Before choosing an investor, you need to apply several criteria to them. The first criterion I would highlight is whether the investor is professional or non-professional. Since the venture market in Kazakhstan is only just emerging, we probably have more non-professional investors in number right now. These are former businesspeople and top managers of large companies who have accumulated money and are now trying to invest it, including in the venture market.

Non-professional investors have both pros and cons. The advantage is that you can negotiate better terms with non-professional investors, because they are inexperienced and doing this for the first time, so you can take advantage of that and secure better terms for the founder. The downside is that these people are unprepared; many things are unclear or unknown to them. You have to explain a lot to them before moving on to the investment. And worst of all, later, once they have put in their investment, you will have to coexist with them for a long time, live together, and at that point there is a very high chance that they will not behave like venture investors: they will ask absurd questions, make demands, put forward absurd requirements and so on.

So there are both pros and cons. A professional investor is easier to work with, because they know the subject, you don't need to explain all of this to them, they understand everything perfectly. The negotiation process is much shorter. But a professional investor has a downside too. It is hard to bargain for any super terms, because they understand everything perfectly; they are sharks with sharp teeth. And they will give you an accurate valuation, no more than it is worth. So that is the downside. The second criterion for selecting an investor is the industry. Even the professional venture investors currently in the market have, one way or another, chosen their own areas where they feel more confident, areas they understand and are familiar with.

And that is where they invest most of their money. For example, marketplaces are very popular. Many people invest in them. MedTech, that is, medical technology, EdTech, educational platforms and so on. To understand whether this is your investor or not, you need to study their dossier and understand which industries are closer and more familiar to them. So if your startup is in those industries, you have a better chance of reaching an agreement with that investor. The third criterion for choosing an investor is probably the stage at which the investor prefers to come into a startup. There are investors who prefer early stages, from the idea, say, to the MVP, to the first sales, to scaling.

That is the segment where they prefer to come in. The second group of investors are those who prefer later stages. What characterizes an early-stage investor? These are investors who are willing to take more risk, because at this stage the probability of a startup failing is very high. They are prepared for that, so they are willing to take risks and to invest in more of these small, fledgling startups. But, accordingly, these investors write smaller entry checks. More mature, larger investment funds, companies and so on prefer later stages.

That is afterwards, roughly at the stage of scaling, growth and so on. They prefer to take less risk and invest more, and accordingly their chance of getting a multiple-x return is lower, but so is their chance of failure. These are the two groups of investors I would highlight. Depending on what stage your startup is at, you need to choose the appropriate investor. Don't waste your time negotiating with… say, if you have an early-stage startup, don't waste negotiations on large funds that invest $500,000 and up. It is a pointless waste of time, both yours and theirs.

The fourth criterion for choosing an investor is their check size. That is, the amount the investor puts into startups. Many investors state their maximum check, and from that statement you can tell whether this is your investor or not. If you have an early-stage startup and need small amounts of money, up to $100,000, then these are most likely precisely early-stage investors. And if your startup has already completed, say, a pre-seed round and has reached the growth stage, then you need to approach large investment funds whose check size matches your expectations and what you need to grow your company.

And finally, the fifth criterion for choosing an investor I would call reputation. As you know, bringing an investor into a startup is like getting married. It is a very important, serious step. You can't rush here; you can't make hasty decisions about your future partner. You need to study them carefully, including their moral and ethical principles, approaches, worldview and so on. Your investor should at least broadly share your views on life, on business, on certain moral qualities and so on. To understand the psychological and moral nature of a future investor, you need to make inquiries about them. How do you do that?

First, I recommend simply typing the potential investor's name into Google, and more often than not, if this person has been involved in any scandals, any incidents and so on, Google remembers all of it and will show it to you; you can read it all in the articles and understand what this person's history has been. You can also gather information about a person through social media: find their accounts on the main social networks and simply read what they write, what they repost, what they like and so on. From these indirect signs you can understand what views this person holds.

And finally, you can make inquiries about a person simply among acquaintances, especially among colleagues, other startup founders, if you have learned that this investor has already invested in some startup. There is nothing wrong with reaching out to that startup's founder and saying: “I'm about to negotiate with such-and-such a person. What can you tell me about them?” And the description that the startup, your colleague, gives will help you understand whether this is the right person for you or not.