Startups looking to scale often need funds for various reasons. Funds ensure that the startup can stay afloat,  has longer runtime, can handle any unforeseen situations, and can reshape the customers’ behaviour to promote their own product. Increasing market traction and scaling operations requires significant funds, which startups can secure only through fundraising.

Fundraising is done by startups in different stages, i.e. Seed, Series A, Series B, etc. The stage of a startup is defined based on different factors like amount of funds needed, current progress of the startup, etc. As the startup progresses through different stages, the startup raises more funds at lower equity dilution for higher valuation than previous rounds.

Choosing an Investor

At this stage, it’s really hard for a first time entrepreneur to understand and assess which deal might be most suitable for them. To assist startups in the best way possible, many Venture Capital Firms provide supporting information and third party references to help the startup make a conscious decision. Often many VC firms provide details of their recent investments on the website along with their portfolio of startups to help how other startups can avail their support.

Startups need to conduct their own assessment on fundraise. Many parameters become clear as the startup asks for more detailed queries on their requirements. Generally, a startup being inquisitive is considered as a good sign by VC Firms, since it helps the VC firm understand more about Startup’s requirements and how they can add value..

We have listed down a few essential aspects a startup needs to evaluate before they close the deal.

1. Connect with Investors’ Portfolio: Most of the established VC Firms have details of their portfolio on their website, or they can share with the startup personally. Connecting to a few startups they have invested in and understanding about their support can be quite useful. 
2. Investors’ Fund Size and Timeframe: A VC Firm is liable to their LPs (Limited Partners), and every fund has a time frame of 8-10 years, which might vary depending on the contract. Every VC Firm has to clear its accounts with LPs within the timeframe. In case the fund is in its last 2-3 years of the contract, it’s highly likely that  the firm won’t be able to help the recently funded startup with further rounds and might pressure them to liquidate at the end of its term. However, if the fund is at its early stage, the firm will be able to help even in the next rounds of financing. Understanding these firm dynamics will help the startup in making a more conscious decision.
3. Access to Investors’ Industry/Network/Expertise: Which sector is the VC Firm focused in? Which stage of startups they have usually funded? Do they have any network which can help the startup in business? It’s essential that the startup evaluates essential questions on these aspects carefully and addresses them during early stage discussions with the investors. Understanding these and evaluating them properly can create huge synergies, which will propel the startup to an explosive growth.  Every firm has different resources, skill sets, and has its own way of supporting startups. The startup needs to see which benefits can add the most value and make a deal accordingly. 
4. Ease of Communication with the Firm: This is the most important thing that can make or break the deal. It is more about understanding the dynamics of a co-founding team with the firm. Are they friendly? Understanding? Do they haggle on unnecessary details? Are they trying to take advantage, or are they helping the startup make a conscious decision? Are their suggestions helpful? Most importantly, is there mutual trust between each other? All these things are hard to assess at once. However, many crucial aspects can be learnt with multiple interactions with the firm. It’s best if the startup doesn’t ignore the red flags seen during discussions, and address them early on. Ignoring them now will prove very costly later.
5. Investors’ Alignment with Startup’s Vision: Every startup has its own mission and vision and it constantly works towards its goals that are aligned with its set of values. Is the VC Firm in sync with the startup’s values? Are they willing to support the startup in their vision? Ensuring the firm’s alignment with the startup’s vision is very important for success in the long run.

Overall, keeping the essential funding details aside, the bottom line is that both parties should have mutual trust towards each other. Building a startup is an arduous struggle which takes many years, sometimes a whole decade, to give significant returns. The odds of success are very low, and a startup needs all the help it can get to make it work. It’s important that both the startup and investors are aligned towards a common goal, are understanding towards each other and constantly look for ways to make things easier for each other.  

For a startup, choosing an investor for the Series A round is one of the most crucial steps that can make or break the company. A startup might want to rush things through, only focus on the valuation numbers and ignore the rest, and try to get the maximum funds possible, but it might prove highly risky, even to the point of losing the whole company. It’s best if the startup evaluates every offer by any VC firm with a long term perspective in mind and chooses the best available option.