Inspired Team
How to Choose a Seed Investor for Your Startup
In short: Start with investors who back companies at your stage and understand the problem you are solving. Narrow the list by testing how they think, asking what help they have provided after investing, and speaking with founders who have worked with them. Choose someone you would want beside you when the company’s next hard decision arrives.
A seed round gives a company time and resources to make progress. It will also begin a relationship that lasts for years. That makes choosing an investor more than a search for someone willing to write a check. You’re entering into a long-term partnership.
You cannot know exactly what your company will need two years from now. You can learn how an investor approaches unfamiliar problems, whether their experience is relevant, and what founders say the relationship is like after the round closes. Use the fundraising process to vet investors, just as much as they’re vetting you.
1. Define what success looks like
Before building an investor list, write down the work your company needs to do with the capital. Which assumptions must you test? What do you need to build or learn? What would meaningful progress look like before your Series A?
Keep the answer close to the reality of your business. A technical team may need to prove that its product can work outside the lab. A company entering a complex market may need to learn how customers buy. Another team may be ready to hire its first leaders or find a repeatable way to reach customers.
Then consider where an investor’s experience could help. You may value someone who can discuss the underlying technology, challenge your business model, or help you prepare for the next stage of the company. Write down your top two or three needs. They will give you a way to assess fit when every introductory conversation sounds promising.
2. Build a shortlist using evidence of fit
Start with investors who actually back companies at your stage. Then examine their portfolio and published thinking. Look for evidence that they have spent time on the kind of problem you are tackling, even if they have never backed a company exactly like yours.
For each investor, record four things:
- Stage: Have they invested when companies were at a similar point?
- Interest: Have they explained why your market or problem matters?
- Experience: What relevant work have they or their portfolio founders done?
- People: Who would work with you after the investment?
An investment announcement is often more revealing than a list of sectors. Inspired Capital’s quantum thesis, for example, explains where the team sees opportunities across hardware and infrastructure. [1] Its account of the first meeting with Teamshares describes what the founders had learned by operating small businesses and why their plan for employee ownership stood out. [2] These pieces show the reasoning behind the investments.
Use what you find to narrow your list. An investor does not need to agree with every part of your plan. They do need a credible reason to spend time understanding it.
3. Prepare your pitch to start a conversation
Your first explanation of the company should be clear: what problem exists, who experiences it, what you have learned so far, and why your team is suited to solve it. Practice with people who will ask difficult questions. If several listeners get stuck at the same point, revise that part of the story.
Early-stage investor Alexa von Tobel gives similar advice in her article on fundraising: repeated questions are a signal to make an answer clearer in the pitch. She also encourages founders to use fundraising to understand how potential investors think and how their firms operate. [3]
You do not have to present every part of the business as settled. Be ready to explain your strongest evidence and the assumptions you are still testing. A useful investor conversation will engage with both. Notice whether the investor asks about the decisions ahead of you or stays only with the story on the slides.
4. Work through a real problem together
A pitch shows how you communicate your vision. Working on a problem together shows more about the relationship you might have after an investment.
Bring a question that matters to the company now. You might be weighing two customer segments, deciding how to test demand, or reconsidering an assumption in your model. Explain what you know, what you do not know, and where the decision has become difficult.
Pay attention to the exchange. Does the investor ask questions that sharpen the problem? Do they listen when you explain what you have already tried? Can they disagree without losing sight of your goals? Do you leave with a clearer way to make the decision?
Alexa has written about making space for substantive strategy work before choosing an investor. [3] You are learning what it feels like to tackle an uncertain question together.
5. Ask what support will look like after the round closes
“Founder support” can mean many things. Ask potential investors to describe the work behind the phrase.
What did they do when a portfolio company needed to change strategy? How did they help a founder prepare for a fundraise, make an important hire, or reach a potential customer? Who on the team was involved? Ask for an example where the company’s needs changed and the investor had to adapt.
Founders’ accounts on Inspired’s team page describe help with financial models and fundraising at ShopMy, communications preparation and hiring connections at Duckbill, and strategic conversations over several years at Rho. [4] Those accounts are useful because they identify the problem and the contribution. Look for that level of specificity in any investor’s answer.
It is also fair to ask about limits. Which kinds of problems can this investor help with directly? When would they bring in someone else? A clear answer helps you understand the working relationship you are considering.
6. Speak with founders before deciding
An investor can tell you what they intend to do. Portfolio founders can tell you what they have done. Ask to speak with founders who have worked with the investor, ideally those who have worked together for several years.
Do more than ask whether the investor is helpful. Try questions that call for a specific experience:
- When did you last turn to this investor with a difficult question?
- What did they do after that conversation?
- Were there times you disagreed? How did you resolve them?
- Has their involvement changed as your company has grown?
- Would you choose to work with them again?
Listen for detail, and remember that one founder’s needs may differ from yours. The aim is to understand how the investor behaves when the work becomes difficult, not to collect a rating.
Make the decision for the years ahead
Before you choose, return to the needs you wrote down at the start. Which investor has shown the strongest understanding of the company you are building? Who helped you think more clearly during the process? Whose account of post-investment support held up when you spoke with founders?
No investor will have every answer, and your priorities will change. Look for someone willing to do the work of understanding the company as it changes with you.
The seed round will close. Choose a partner you would want to call when the next hard decision arrives.
Sources
[1] Inspired Capital, “Why We Bet on Quantum”
[2] Inspired Capital, “From a WeWork to the Nasdaq: Six Years with Teamshares”
[3] Alexa von Tobel, “How to raise venture capital in a hybrid world,” Fast Company
[4] Inspired Capital, Team