Seeking an investor for your startup? Read this first!

A startup aiming for strong growth should consider seeking a venture capital and private equity investor to join their company’s growth story. When a professional investor invests in the company and becomes a minority owner as well.

Startups are typically not profitable in the early stages as they build their product and find their market. Therefore, startups often raise funding from venture capital and private equity investors. Investors aim to increase the company’s value by actively working with the company and then exiting the company through an acquisition or listing.

If you’re considering seeking an investor, keep in mind the following questions:

1 Are you interested in building an international growth story?

Venture capital and private equity investors often aim to invest in companies with international growth potential. The entrepreneur, as well as the service the company offers, must be motivated and capable of international growth.

2 Can you commit to one company for up to ten years?

Startup growth passages are often lengthy and demanding. Therefore, the entrepreneur or a team seeking for an investor must be prepared to work for the one company for at least 5-7 years. It is difficult to divide your energy among other companies at the same time.

3 Are you targeting a growing market?

Rapid growth often requires that the market the company is targeting is also growing. The market must be one that enables a scalable business model.

4 Are you willing to give up part of your ownership?

In exchange for the investment, the investor receives a share of the company’s ownership. If multiple investment rounds are required, the entrepreneur’s ownership percentage decreases, or dilutes, further. However, later investment rounds are usually larger, resulting in the company being valued higher. In this case, the absolute value of the entrepreneur’s ownership usually increases, even if the entrepreneur owns a smaller percentage of the company.

5 Are you ready to collaborate?

The entrepreneur must be willing to develop the company together with the investor. Investors work with their portfolio companies even on a weekly basis, for example, on products, the market, and the next funding round.

6 Are you willing to sell the entire company in 5-10 years?

The investor’s goal is to exit their portfolio company after a certain period. Simultaneously, the entrepreneur often has the opportunity to sell more of their ownership. The entrepreneur must also be prepared to sell the entire company if the new owner requires it. Typically, however, the entrepreneur remains working in the company, and this is often a requirement in an acquisition. Even in the case of an IPO, the entrepreneur usually remains a partial owner of the company.

***

The article is part of a blog series based on the association’s fundraising guide for entrepreneurs. You can find the full guide here.