Recommended Process
A recommended process to identify the ‘most likely’ investors.
In a given raise process, the highest leverage activity is to focus on the “most likely” investors. When founders take a data-driven approach to zoom in on the right investors, they experience higher conversion rates at every step of the funnel. The below guidebook provides an overview of how to identify investors that are the most likely partners for a given raise.
1 – Identify Investors in Similar Companies
A recommended starting point is to identify investors that have invested in similar companies. These investors are often the “most likely” partners (given the empirical evidence around their prior investment activity in similar companies). This is best achieved by using Metal’s “Company Search” module that allows users to:
Provide a description of their Company
Users can type in a description of their Company, enabling Metal’s proprietary algorithms to identify other VC-backed companies that are similar. Users can hit “Settings” from the top-right, navigate to “Product Details”, and fill in the required information.
View all VC-backed companies that are similar
In the “Company Search” module, you can now view all companies that: (a) Have raised VC financing and (b) Are somewhat similar to the description provided in Step 1 above. Users can also apply other filters to further refine the list of companies.
Shortlist companies that are actually similar
Users can shortlist companies that are actually similar and save these to a list via the “Actions” elliptical menu on the top-right of the Company Search table. Ideally, these should be companies that are similar, but are not direct competitors.
View investors that have invested in shortlisted companies
Load the saved list into the “Investments” filter within “Investor Search” — this will show all investors that have previously invested in the list of shortlisted companies. Users can then layer other filters on top to further refine this list.
Investors that have invested in similar companies can be an excellent starting point. As an example, a Company building a foundation model may want to identify investors that have invested in other foundation models before. These investors tend to have a thorough understanding of how foundation models work, resulting in high-context conversations.
2 – Develop an Elimination Criteria
In order to identify investors that are a strong-fit for a given raise, users first need to develop an elimination criteria — a set of requirements that qualifies a given investor as a likely target. To develop an elimination criteria, founders need to make the following key decisions.
When round size is significant ($1-2m+), users need a lead investor to bring the round together. The lead investor plays a critical role by: (a) Setting the valuation cap for the round, and (b) Coalescing other investors to participate. Typically, the lead investor is the first to invest, and does so without waiting for other investors.
When round size is small (<$1m), founders can often structure a “party round” whereby a large number of investors with small check sizes make up the round (without requiring a lead investor). Similarly, companies that are backed by well-known incubators (such as YCombinator or Techstars) are often able to structure large party rounds without necessarily requiring a lead investor.
For guidelines on how party rounds work, refer to this section.
For users looking to structure party rounds, the focus should be on identifying follow-on investors that write small checks in existing rounds.
The lead decision drives the user’s decision for the following filters: Inclination to Lead
When round size is significant ($1-2m+), users need a lead investor to bring the round together. The lead investor plays a critical role by: (a) Setting the valuation cap for the round, and (b) Coalescing other investors to participate. Typically, the lead investor is the first to invest, and does so without waiting for other investors.
When round size is small (<$1m), founders can often structure a “party round” whereby a large number of investors with small check sizes make up the round (without requiring a lead investor). Similarly, companies that are backed by well-known incubators (such as YCombinator or Techstars) are often able to structure large party rounds without necessarily requiring a lead investor.
For guidelines on how party rounds work, refer to this section.
For users looking to structure party rounds, the focus should be on identifying follow-on investors that write small checks in existing rounds.
The lead decision drives the user’s decision for the following filters: Inclination to Lead
For venture-backed companies, each round stage carries a very specific set of expectations (in terms of both round valuation and business progress).
As an example, pre-seed investors routinely invest in companies that are doing zero (or minimal) revenue, and are pre-product. For pre-seed investors, investing at the idea stage is the norm, and their risk/reward model is built around writing checks at that stage. Seed stage investors, however, rarely invest in companies that do not have significant operating data and revenue growth. Pre-seed and seed investors are, therefore, playing very different games (with most investors specialising in a specific stage).
For guidance on investor expectations at each stage, refer to this section here.
For each round stage, it is important to understand the stage definition and the underlying investor expectations. A common misstep in the fundraising process is when users target and/or engage investors that do not specialise in their stage. This misstep is often coupled together with an ambiguous understanding of the Company’s stage.
The stage decision drives the parameters for the following filter: Minimum % Investments in Selected Stages
The targeted size of the round significantly impacts the types of investors that users must pursue when finding startup investors
For small rounds ($0-1m), there are numerous options – users can put together party rounds consisting of angels and small check VCs. For larger rounds, it may be important to have a lead investor, and that may require a different search criteria.
For guidance on how to determine round size, refer to this section here.
Specifically, founders raising a round of 2m or higher can target lead investors that have a fund size between 100m to 300m. Users looking to raise a 5-10m round may need to target investors with large fund sizes (higher than 250m).
The round size decision drives the parameters for the following filter: Fund Size
Some users may take a broad approach and focus on investors that have previously made investments in their parent sector. Examples would include users looking for investors that are familiar with B2B Software, Healthcare or Consumer.
Other users may prefer to take a more targeted approach and focus on investors that specialize in a given sub-sector. Examples would include users looking for investors that specialize in biotech or life sciences.
Prior to identifying investors, it is important to make an intentional decision on whether to go broad at the parent sector level (I.e. investors that are familiar with Fintech or B2B Software), or to go deep on a specific sub-sector (I.e. investors that specialise in robotics or in biotech).
The sector decision drives the parameters for the following filter: Sector Familiarity and Sector Concentration
Some users may want to identify investors that are familiar with a given continent (I.e. North America, or Europe). Others may want to identify those that have previously invested in certain types of geographies (I.e. Egypt, Bangladesh, Indonesia or Pakistan). It is generally important to determine a specific geo criteria (driven by a clear thesis or rationale).
As an example, a founder building in Indonesia may look for investors that: (a) Have made at least “1” investment in Indonesia, and (b) Have made at least 5%+ investments in the broader Asia continent.
The geo focus decision drives the parameters for the following filter: Investors by Continent and Investors by Country
3 – Identify “Most Active” Investors at a Sector Level
Using the sector insights section within Metal (Insights > Sectors), users can identify investors that have been the most active in a given sector. This is achieved by first selecting a set of parent and/or sub-sectors and then applying other filters:
-
Investor Type:
Use this filter to limit table results to only “Accelerators”, or “Family Offices” or “Venture Capital Firms”
-
Time Period:
Allows users to limit table results to a specific time period (I.e. users can see which investors have been most active in selected sectors within a given time period)
-
Continents:
Filter can be used to limit table results to a given continent (I.e. users can see which investors have been most active in selected sectors within a given continent)
-
Round Stage:
Allows users to limit table results to specific stage(s) (I.e. users can see which investors have been most active in selected sectors within a defined set of stages)
The above effort is most useful to identify investors that have been most active or bullish on a given sector (or sub-sector). This is particularly useful for niche sectors, such as biotech and/or robotics.
4 – Identify “New Comers” at a Sector Level
Using the new fund insights section within Metal (Insights > New Funds), users can identify investors that have made their first investment in a given sector or sub-sector. Investors that make their first investment in a given space are often interested in identifying more companies that are building in the same space.
Some of these investors may also be new firms that are just getting started. Such investors are particularly appealing given that new firms tend to have the highest appetite to deploy and the least amount of deal flow, making them excellent prospects as financing partners.