So you are a business startup in a hi-tech industry and you are making inroads into your market with a brilliantly executed business plan, a solid team behind you and a product that makes your competition cringe — now what?
In your meteoric rise you spent a lot more in marketing than you anticipated, and you were a long ways off on forecasting the cost of your programmers. You need an influx of capital not only to stay afloat, but also to get to the next level and take out the competition that are nipping at your heels.
You need more money, and your first round came from friends and family, so they are all tapped out. You may be able to go to the bank, but you’d rather follow your buddies who also own hi-tech companies and find an investor. They did it, so it can’t be that difficult… or can it?
Investors… you gotta love these guys. After all, they come through for you when you need them, and they throw all kinds of money at the next great idea. They are all so compassionate and empathetic that it almost feels bad to take their money. Maybe this happens in a different reality.
Investors are a lot of things, and if money is all you want from them, then try the bank. Investors are more than money. If you want your business to really succeed and make it to that next step, you need to be strategic about whom you select to have invest in your enterprise. You heard me correctly — who youselect!
A lot of startups grab the first guy who offers to invest in their business without considering a number of reasons why they should pick one over the other. Rarely will an investor put money into a business without considerable due diligence, so why shouldn’t you hold them to the same scrutiny? I realize it is very difficult to say no to the first investor you contact, but it has to be a good fit on so many levels for it to work in the best possible way for both you and the investor.
What is Due Diligence?
Due diligence, according to Wikipedia, is an investigation of a business or person prior to signing a contract. You wouldn’t buy a car without checking out the contract, looking at other dealers for a better price or more options so why would you be less careful with your business and your future?
We are working on due diligence for a couple of people we want to work with at the moment. We’ve asked around about how they work, what are their strengths and weaknesses, and if there are anything that might raise red flags. We talk to their partners, associates, maybe even their employees, and certainly with others they have worked with in the past. When a lot of money is at stake, you must take your time and look under every rock to be satisfied.
Think of your investor as the partner with money. You wouldn’t bring someone into your company strictly for the cash (well, some might). Hopefully, you would consider their skill set as a contributing benefit to your startup. Many investors I work with have very extensive financial backgrounds and would be very handy to have around for structuring future financing or helping with tax considerations. An investor for one of our ventures has very specific knowledge on some aspects of manufacturing that can really benefit the organization. We would not have known his skills unless we did our due diligence on him.
Does the investor have resources that can benefit your company? Maybe he has investments in other businesses that can be value added for your startup. The very least he needs to bring to the table is his networks, both personal and business. An investor with considerable people resources can be invaluable for developing leads, forming alliances and even finding the right suppliers. One of my clients had an inventory problem and couldn’t fill a new first order in time. We found him another company that could help him from our network
When we go to a company to help them raise capital as part of the deal, we invest in the business as well. As part of our investment, we embed one of us into their company in a position that can add to their management team. A number of investors I know like to embed or hire ‘one of their guys’ to be the CFO of the business they invest in so they have an eye on where the investment money is being utilized. This is a sound decision for both parties.
The right mix encompasses two areas: the industry and the team. An investor I know is an expert in the same field of the company that he invested in. As a seasoned expert in hi-tech manufacturing, he was an ideal investor to bring money into a local hi-tech company in almost the same sector where he had made his fortune. I know the guys my friend invested in thought they had died and gone to heaven, it was such a perfect match. That match happened because the founders held out for the ‘right’ investor who could help with more than a checkbook.
The other part of the right mix is the investor’s interaction with your team. I know that sometimes it’s important for investors to be visible in the organization, giving a sense of comfort, and a feeling that everything is going smoothly. If your investor is just part of the financing and doesn’t want to be part of managing the company that’s alright too, but if he wants to play some role, he better be part of the team. It’s often a little difficult for an older baby boomer to work well with a team of Millennials. It’s not hard to make that as one part of your criteria for selecting an investor. Make sure that you know if the investor plans to add a member of his staff to the team so you can feel them out.
Going back to the last point — the team — you should consider your investors engagement level as a criteria for selection. If you are a lone wolf entrepreneur, you may not want a ‘foreigner’ to be part of your personally selected management team. It’s not a necessity that the investor be involved in the company besides a financial one but it can be a negotiating point at some point so be prepared. I know many investors who are content to be on the Board of Directors or the less official Board of Advisors just because they have the knowledge and want to be part of the mentoring process.
The commitment level sort of follows the engagement level. A 75-year-old investor might not be interested in a long-term commitment with your company and would be looking to ‘cash out ‘ sooner than later. You need to know if the investor is going to follow the natural timing of the company as it moves through the maturation process to a possible liquidity event without pressuring you along the way or does want to get a quick return. Either way is fine, as long as you are prepared to accept those terms.
The bottom line in selecting an investor is to take your time and make the right move for your startup and for you. After all, an investor can make or break your fledgling startup, so pick the right one for your unique needs!
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