Founders face a critical decision in the first year of building: what kinds of investors should you work with?
You'll have to prioritize between different investors and various offers, and choosing the right early investors will have a major impact on the success of your company.
The Three Things Investors Offer
Every investor gives you some combination of three things: capital, help, and signal.
Capital is the money. Help is the work they do alongside you. Signal is the reputation their name carries every time you recruit candidates, sell to customers, or raise money again.
Most founders optimize for the wrong things when they raise money. They chase the highest valuation or the fastest term sheet and treat fundraising like a transaction.
It's not just a one time transaction. It's a foundational company decision — arguably one of the most consequential ones you'll make in the first year of building your company.
Capital & Terms
Capital is the money you need to accelerate your business, and it is the easiest part of an investment offer to evaluate. The terms are typically standardized and you can compare the terms of different offers easily. It's important to figure out what the market terms are for companies like yours. The best way to understand the market terms is to ask other founders who recently raised money what terms they got when their progress was similar to yours.
Setting terms for early investors is often up to you. Increase the valuation of your company and usually fewer good investors will be willing to invest. Raise too much money and you'll face extra dilution.
Evaluating Help
Help is the work that investors do alongside you. This could be helping hire founding engineers, helping you tell your story better, giving you product feedback or introducing you to customers.
Every investor says that they will help you do some combination of these things. How do you know which ones actually will? You need to look into their reputation by talking to founders they've backed recently.
Ask founders they've backed: are they your most helpful investor and would you take money from them again?
If you're not sure what help you need, ask yourself: between now and the next funding round or milestone, what obstacles might I face and who could I add as an investor who could help me avoid those problems?
On the long and windy road to finding product market fit, you will want investors on your side who have accomplished the things that you're trying to do and can help you see around corners.
Signal
An investor's signal is the most difficult thing to evaluate, because it's subjective and can even change over time. Investor signal matters because it becomes part of the foundation of your company's reputation.
When you have high signal investors, every future conversation with a candidate, customer or potential investor will be smoother. If your investors are seen as very selective, the signal their investment carries is even stronger.
There is no canonical list of the "highest signal investors" but generally speaking, they are also investors with the best historic performance, as judged by how many good companies they've invested in. Here are two lists that approximate the best investors: Seed investors who've backed the most $1B companies and Business Insider's Top Early Stage Investors.
The Right Order
You should prioritize investors in this order: help, signal, capital.
First choose investors based on who will help you get from where you are to your next milestone — these are often the investors who are most helpful based on founder references. Then choose investors based on who carry the strongest signal, since it will follow you for the life of your company. Once you find investors who are either helpful, a strong signal, or both — prioritize the terms of the capital, optimizing for raising enough money on market competitive terms.
You need every advantage you can get as a startup founder, and adding the right early investors can help a lot. You'll spend many years working with these people — so have you chosen investors that will increase your odds of building a successful startup?