How should we evaluate a potential investor?

What are the criteria start-ups should consider?

Vrisha Phrabhakaran

11 Jan, 2022

3 Answers

Wallace Ho


When approaching investors, here are some guidelines of questions and preparations when you talk to them:

  • Ask for money you get advice, as for advice you get money. So do not instantly ask them to invest, get to know them better first, unless you have been given opportunity to pitch more than 15 minutes.
  • To bear in mind, investors coming in your company is like getting married. You can't "divorce" just like that.
  • Therefore, you have to ensure your common/ultimate goals are aligned with them. You all do not have to agree on everything, but you have to have alignment towards the goals, especially on the exit at the end of the day.
  • Do enough research / due diligence on them. At least check on their:
    • investment mandates,
    • investment stages,
    • industries they focus on,
    • ticket size of investment,
    • existing portfolio,
    • fund life span,
    • regions they focus on and etc.
  • It'd be best if they are the industry expert in your industry or they are having sufficient knowledge in what you are doing. Checking their existing portfolio could help.
  • Kindly ask them to provide terms sheet especially if they are venture capitals. Most of the venture capital firms will prefer you to follow their terms sheet. If not, you have to prepare terms sheet from your side especially for angel investors. Best case scenario is they follow your terms sheet.
  • Ensure that you know & understand what are:
    • terms sheet,
    • SHA (share holder agreement),
    • internal shareholder agreement,
    • convertible note / SAFE (simple agreement for future equity) / RCPS agreement (Redeemable Convertible Preferred Shares) / agreement for equity.
  • Get yourself familiar with some startup legal terms such as:
    • ordinary shares,
    • preference shares,
    • tag-along rights,
    • drag-along rights,
    • pro-rata dilution,
    • anti-dilution,
    • ESOP (employee stock options pool) and etc.
  • Ask them for advice such as,
    • what can be improved for your startup
    • what short-term and long-term support they can provide,
    • how do they usually help their startups,
    • can they bring you partners,
    • can they connect you with MNCs, governments,
    • can they connect you with venture capitals for further rounds
  • When they show more interest in your startup and expressing interest to invest, ask them what they see in your team and startup and why are they having interest.

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Barry Chen

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When it comes to raising funds from investors, picking the right investor is crucial.

In fact, investors could totally ruin your company if chosen poorly.

Fundamentally the focus is to align your goals with theirs. If they're in for quick returns and you're building an early stage startup, that is a very bad mismatch.

Also it is crucial to understand how they can help besides just offering you money. 

  • Can they introduce you to clients?
  • Can they help you raise funds?
  • What can they teach you?

If they're solely giving you money, you may want to take money from those who don't expect a quick return, that gives you a longer timeline to produce results.

If you're raising money from institutional investors like VCs, that's a whole different ball-game. You need to know your numbers and can demonstrate long term potential to scale.

Brooks Drew

Professional Forex Trader/ Bitcoin Investor

For me, the first thing I look for is how they treat me when I pitch to them.

If they are rude, I immediately write them off.

Investors are supposed to go into partnership with you, and the moment they act like a prick, it's not worth anyone's time.

And if they're nice, I then look to see if they would make a good partner. Things such as:

  • Are they helpful or are they looking for a quick ride to returns?
  • Do they have the capacity to invest?
  • Can he teach me something and help me during tough times?

While I'm not against any investors focusing on driving returns, but they need to be very clear about what they're getting into. I don't like babysitting broke people.

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