A question that can potentially change the life of an entrepreneur! Here’s another of Inner Circle‘s Alejandro Cremades’ piece we’re sharing on the network for our members. Let us know if you agree with this article and do share your opinion!
The amount of money that can be raised may be one of the least significant factors when picking an investor for your startup business. Your investor choices can either destroy your dreams and turn them into nightmares, or breakdown numerous barriers on your flight to your full potential.
When you onboard an investor, that institution or individual becomes part of your cap table, and it’s for the long run. It is well known that divorcing your wife or husband is much easier than divorcing your investor. You need to be very careful with who you are getting into bed with.
This is critical to get right, even for the smallest amounts of initial seed funding from friends and family. Those initial investors are going to have a huge impact on who you will be able to attract for additional rounds of funding, and what those terms will be. So even if it is borrowing $1,000 from a relative or classmate, make sure there is no lack of clarity on the agreement, and that you aren’t setting yourself up for heartbreak later on.
Deciding what’s important in an investor or capital source at the outset helps founders streamline the process of filtering and screening, while empowering them to make good decisions. This really has little to do with the money part of the equation.
The Right Type of Investor for Your Stage
One of the most fundamental steps is checking that you are searching for the right level of investors for your stage or round. Everyone wants that VC money. Yet, before you get there, you’ll probably need to be holding angel investor and friends and family funding rounds.
Ability to Fund
Raising money is enough of a distraction for entrepreneurs. You certainly don’t want to lose any more time by wasting it on those who don’t really have funds available to put in.
When was the last time the prospective investor funded something? How much does the investor have left? How are the investor’s other investments performing? How strong is the investor financially, really? You don’t really want your start-up to be the only hope for the investor.
If the investor isn’t doing well financially, that person is going to be under a lot of stress, and that pressure will flow down to you. Even if it isn’t that serious, it is clearly more efficient and profitable to have an investor partner that is able to provide further rounds of funding on his or her own. It is even better if they are connected to others with capital. Birds of a feather flock together.
At the other end of the spectrum, when you see a venture capital firm that has not made new investments, or not followed up on investments in a period of six months, you know they are running out of capital on their fund and they are having troubles in securing the next fund. Investors need to schedule regular meetings with entrepreneurs, regardless of being in investment mode or not. For this reason save yourself time and move on to another firm that has the ammunition to pull the trigger.
Reputation for Funding Repeat Rounds of Investment
Finding new investors at every round is expensive and time consuming. It also dilutes your ownership, and can make your company less attractive to others in the future. Find investors who are already in the habit of participating in future funding rounds and cut down on these issues.
Diversification
One thing few entrepreneurs think about is making sure they are selecting a diverse range of investors, with diverse portfolios. This has many benefits in terms of reach, influence and access. Yet, it is also important for maintaining your slack and raising funds later on.
For example; if you only have three investors in your social networking startup, each of whom had 30% of their portfolio in Facebook, and Facebook goes down hard, it’s highly unlikely you’ll get more money from them. In fact, they’ll probably mount an enormous amount of pressure on you to make up for it. Perhaps at the cost of your current customers and reputation.
Interest in Being a Lead Investor
Lead investors typically establish the terms of your financing round for everyone else to invest with the same terms. In this regard, to be considered lead investors they would invest over 15% of the entire amount that you are seeking to raise.
Once you’ve secured a strong lead investor there should be no lack of interest from others. Focus on wooing that lead investor first and everything else will fall into place and be easier.
Influence
How much influence do they have in your industry, with other investors, with distribution and media channels, and with other influencers? This can far outweigh the amount of money being invested or the terms.
For example, some of the top tier early stage VC investors like Firs Round or Andreessen Horowitz have an tremendous amount influence in the venture space. If they invest in your company they could also support you with resources around HR, marketing, subsequent financing rounds, etc. That type of value is something to look after when doing your capital raising efforts.
Fit for Your Brand and Culture
Consider how great of a fit this investor will be for your brand and company culture. There’s a good chance they’ll be on your board and make many brand and office related decisions. People will instantly associate their brand with yours.
Appeal to Other Investors
Will having this investor on board make it more or less attractive for your other ideal investors to participate in this or future rounds?
In many instances, having recognized individuals on your board could help to convince others to join the board as well by making a meaningful investment. Many investors consider boards as a good venue to develop relationships and see it as a solid way to do networking.
Moreover, the reputation of your board members will provide a great degree of credibility towards your venture. Remember that early stage investing is all about trust.
Easy to Get Along with
Often overlooked, but extremely pivotal is whether these investors are easy to get along with. For you and your founding team, other investors, key talent and vendors. If you lose all these people, the money you got probably won’t keep you in business.
In this regard, I remember meeting a founder that once told me she would end up crying in every board meeting and that her investors that happened to sit on the board were really unpleasant to deal with. To my surprise, these investors were actually top tier VC investors. Make sure that folks that you decide to partner up with are ultimately good people.
Control & Intent
Do they believe in the mission and you as the key team to make it happen? Will they give you room to do your best work? Or will they sabotage you and your reputation, and look for reasons to push you out of your own venture?
Summary
Clearly, who you pick as investors is absolutely critical to your success. It will make or break you. These factors can be part of a strong checklist for vetting potential investors in your startup. Keep this in mind when tackling due diligence, engaging in investor meetings, preparing questions, and learn how to read people.
Don’t just settle for money. Look at what else an investor can add. If you’ve ever watched an episode of The Profit with serial investor Marcus Lemonis, you’ve witnessed how an expert with a fresh perspective can add a ton of value.
This doesn’t mean investors are going to come in and take over your business. But perhaps they can lend their experience to help you make traction. Sometimes all it takes is a few tweaks you hadn’t thought of. What’s offered could be business-related in general, industry-specific expertise, or, simply funding and the financial aspects of your venture.
Ask what expertise this capital source brings to the table that makes him or her more valuable to you than the next one in line.