When it comes to investors, it’s good to know that you’re on the same page. While the financial side is undoubtedly crucial, there are other things to consider before bringing new faces to the top table.
Below, we highlight some of the most important factors in finding the right investor for your business.
At the start of your venture, you might not be particularly picky about who is investing in your business.
But choosing the right investors can be crucial to long-term success.
Their experience and track record
When you’re reviewing potential investors, one of the most important qualities to look for will be their experience in your industry.
As well as potentially harbouring a keen interest in reinvestment, they could also act as an adviser in the future. On the flipside, an investor who’s willing to reach into their pocket can seem like a no-brainer – but if they lack the experience required for your business, you may be better off without them.
Before sealing the deal, it can be helpful to do some digging into their investing track record. Have they worked with companies like yours in the past? What shape are those companies in now?
How stable are they financially?
If you’re welcoming an investor on board, you need to be confident that they can invest their money without too many caveats.
Some key questions that to ask before signing any paperwork might be:
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?
If your investor isn’t in the best financial position, their stress and issues will inevitably have an impact on you and your business, too.
Whatever their circumstances, it’s more efficient and profitable for you to have an investor who is able to provide further rounds of funding on his or her own, without additional baggage – and even better if they’re connected to others with capital.
Word on the grapevine
It’s expensive sourcing new investors at every round, costing you precious time and money. It also dilutes your ownership, and can make your company less attractive to others in the future.
If you can do your research into the reputation of your investor, finding out if they are already in the habit of participating in future funding rounds, then you’ll be cutting out a lot of legwork.
Along with researching reputation, references can be key to helping you find the right match for your business.
Some start-ups will only work with accredited investors to be sure they are getting involved with someone who has previous investment experience.
However, regardless of whether you’re choosing an individual or accredited investor, it’s important to always check with references and follow up with previous investments that have been made.
Levels of influence
Looking into how much influence a successful investor has in your industry can offer you some additional food for thought when considering their value to your business.
If they hold influence with other investors, with distribution and media channels, or with other influencers, their role in your business could extend further than the amount of money they are investing.
In the same vein, their overall professional network – or lack thereof – is a factor worth examining.
A solid network can bring you personal mentorship as well as advice to help you strengthen your business plan, operations, and other potential areas for improvement. Checking out the size and location of an investor’s network, as well as the industry and functional expertise it comprises, is well worth the effort.
Ultimately, their relationships with other entrepreneurs—or their lack thereof—can also be an indicator of their reputation.
The start of something special?
Granted, it’s a little optimistic to think you’ll have a crystal ball to indicate you’ve found your perfect match in an investor. But it’s often said that divorcing your spouse is far easier than divorcing your investor.
So, if they are investing in your business, you need to really size up whether a person is going to be a good fit for your brand and company culture.
If they’re going to be sat on your board, or involved in the big decisions, you’re going to want their values to align with yours. Otherwise, you’ll soon start clashing on the big decisions – and don’t underestimate how quickly things can turn sour.
Diversification among investors
Once you’ve got the ball rolling and are looking at multiple investment streams, another consideration should be whether you’re selecting a diverse range of investors, with varied portfolios.
This has many benefits in terms of reach, influence and access - but is also important for maintaining a steady ship, should things out of your control go awry.
Imagine this: you have three investors, all of whom have an extremely high percentage of their portfolio invested in the same company. If that company goes down hard, it’s highly unlikely you’ll get more money from any of them. In fact, they may all in turn look to your business to make up their losses. This is pressure you don’t need, and this is why diversification is key.
A squeaky-clean term sheet
Along with the factors that make a great investor, it’s also important to know what a red flag looks like. Top of many advisers’ watchout lists would be an onerous term sheet.
Central to the nature and value of an investment, term sheets can be hundreds of pages long, and could create a disconnect between the valuation you desire and the valuation an investor is willing to give you.
Unfortunately, it’s not uncommon for investors to draft up term sheets that benefit themselves. With this in mind, knowing whether you’ve received a ‘clean’ term sheet (one that isn’t heavy on investor-favourable terms) is critical.
There’s little education around this topic for first-time business owners, and mistakes are often made during early rounds of investment – particularly when you’re willing to welcome anyone with an open wallet into the business.
Here are three things you should avoid to retain more upside for yourself and your employees:
Anything above a 1x liquidation multiplier
Participating preferred stock
Full-ratchet price-based anti-dilution provisions
Getting the right financial advice for your circumstances is key to your long-term business growth. Find your perfect financial adviser now.
If you found this article helpful, you might also find our article on venture capital trusts informative, too.