# What to look for in investors?
- URL: https://www.petrikajander.com/what-to-look-for-in-investors/
- Author: Petri Kajander
- Date: 2020-10-22
- Language: en
- Audio: https://anchor.fm/s/1018a6478/podcast/play/98857233/https%3A%2F%2Fd3ctxlq1ktw2nl.cloudfront.net%2Fstaging%2F2025-1-22%2F395326655-22050-1-83a2d4882111006a.mp3
- Video: https://www.youtube.com/watch?v=cfVeOUFSECo

Growth companies may need external investors. How to select the right investors for your company?

Consider your investors as long-term partners. Once you are in the relationship it lasts for years and it’s hard to change the situation if you’re unhappy or have a buyer's remorse.

Money is the easiest part. That’s the very definition of an investor. They provide you with funds. It’s the lowest common nominator.

But even the basic level can have pitfalls. Are there some special conditions or covenants that channel back part of the money or are you also trading in favours or other side deals tied to the transaction?

This leads naturally to ethics. How compatible are your values and world-views? When things are going well there’s not much to worry about.  But where challenges arise the true colours come up quickly. Those with right values and aligned business purpose will stand with you and it’s easier to do things the way that may not be the easiest, shortest or cheapest. You appreciate character when it’s easier to ghost or weasel out.

One of the worst scenarios is where your investor uses the challenging situation to their advantage and as leverage against you for their gain. This can happen at dear cost to the company, employees and even to other investors.

How much do they understand your business and the industry? If the investor candidate grasps quickly what you do, the benefits, the value prop, your position, the potential and the whole nine yards this indicates that they are comfortable with the business dynamics in your field. It’s always easier to communicate with someone if you speak the same language. You can focus on the substance and the core issues instead of explaining the basic lay of the land and dynamics.

This is your insurance in bad times, too. If you investor knows the domain they are better prepared for changes in the overall market and the company-specific situation.

A proxy for the opposite is where the investor considers your case as a financial investment. There are exceptions but if the focus is quickly on numbers and financial matters this can tell that the investor does not understand the industry, the business model or the finesse of your business. Managing by numbers and risk factors work better in established businesses but it is often a formula for disaster in a highly volatile and unstable environment that startups and growth companies are in. The more limited the understanding the more rigid and formulaic the approach tends to be.

How experienced is the investor? If your investor is just starting the journey of angel or institutional investing (e.g. a new VC) then you’re the practise case. This may sound like a good opportunity but caveat emptor should be applied and shouted loud and clear non-stop. You’re just calling for trouble to yourself but when you realise the true cost of your choice it’s already too late. Then you’re in a damage control mode that is never fun and all options are costly.

Investor inexperience can manifest in many forms but one of my personal favourites are the situations (and there are many variations) to shoot oneself in the foot. You know you’re in the deep end of the pool when an investor does not understand their self-interest and creates havoc for everyone as a result. It’s a sad state of fairs when the entrepreneur needs to teach the ropes of the trade for the investor and show the light why a certain course of action benefits the investor (and the target company).

Insecurities, ego issues, fears and ignorance can bring disharmony and even break some ventures as a result. You may even miss your exit window entirely as Tero Mennander explained in his [episode](/mixing-startups-and-vc-with-french-seasoning/).

The topic is vast but the main gist is simple. The better you research and the better aligned your investors are with your core values, motivations, objectives, expectations and business perspectives the easier the ride will be. The art is on the preparation that is often overlooked or even skipped.

Select your investors with care. Your success depends on it.

[Video](https://www.youtube.com/watch?v=MQy7GFdH6hY)

## Transcript (https://www.youtube.com/watch?v=cfVeOUFSECo, YouTube's automatic captions)

[0:03] Investors growth companies may need investors how to select the right investors for your company consider your investors as long-term Partners once you are in the relationship it lasts for years and it's hard to change the situation if you're unhappy or have a remorse money is the easiest part that's the very definition of an investor they provide you with funds it's the lowest nominator but even the basic level can pitfalls are there some special conditions or covenants that channel back part of the money or are you also trading in favors or other side deals tied to the transaction this leads naturally to ethics how compatible are your values and World Views when things are going well there's not much to worry about but we're challenging arise the true colors come up quickly those with right values and aligned business purpose will stand.

[1:06] With you and it's easier to do things the way that may not be the easiest shortest or cheapest you appreciate character when it's easier to ghost or weasle out one of the worst scenarios is where your investor uses the challenging situation to their advantage and as leverage against you for their gain this can happen at dear cost to the company employ emplo es and even to other investors how much do they understand your business and the industry if the investor candidate grasps quickly what you do the benefits the value prop your position the potential and the whole nine yards this indicates that they are comfortable with the business Dynamics in your field it's always easier to communicate with someone if you speak the same language you can focus on the substance and the core issues instead of explaining the basic lay of the land and Dynamics this is your insurance in bad times two if you investor knows the domain they are better prepared for.

[2:10] Changes in the overall market and the company specific situation aoxy for the opposite is where the investor considers your case as a investment there are exceptions but if the focus is quickly on numbers and financial matters this can tell that the investor does not understand the industry the business business model or the Finesse of your business managing by numbers and risk factors work better in established businesses but it is often a formula for disaster in a highly volatile and unstable environment that startups and growth companies are in the more limited the understanding the more rigid and formulaic the approach tends to be how experienced is the investor if your investor is just starting the Journey of angel or institutional Investing For for example a new VC then you're the practice case this may sound like a good opportunity but Caveat Emptor should be applied and shouted loud and clear nonstop you're just calling for trouble to yourself but when.

[3:13] You realize the true cost of your choice it's already too late then you're in a damage control mode that is never fun and all options are costly investor in experience can manifest in many forms but one of my personal favorites are the situations and there are many variations to shoot oneself in the foot you know you're in the deep end of the pool when an investor does not understand their self-interest and creates Havoc for everyone as a result it's a sad State ofs when the entrepreneur needs to teach the ropes of the trade for the investor and show the light why a certain course of action benefits the investor and the target company insecurities ego isues fears and ignorance can bring disharmony and even break some Ventures as a result you may even miss your exit window entirely as Tero menander explained in episode the topic is vast but the main gist is simple the better you research and the better aligned your investors are with your core values motivations.

[4:18] Objectives expectations and business perspectives the easier the ride will be the art is on the preparation that is often overlooked or even skipped select your inv investors with care your success depends on it.

## Transcript (https://www.youtube.com/watch?v=MQy7GFdH6hY)

[0:00] What do you look for in investors? Who should I get into my company? Who should be the one who is a long-term partner in my business? I'm sharing now something which has taking me many, many years, and even more mistakes and hardship and not so nice stories, but also some success stories. And obviously, I've also read widely and learned from other people's experiences. This ever-evolving topic, a journey which will never end if you're doing growth companies. I'm also happy to hear your stories, comment on the comment section, write or ping me and we can talk about more of this topic because I think it's important.

[0:57] But let's get started first with the basics. An investor gives you money. That's the very fundamental and the lowest denominator in any investor, they give you money. They give you the funds, the means to do something, but not all the money is equal money. The first red flag is that if the money is tied to some other side deals. They say that well, I will invest but can we do this or can we do that? Or can you include me some ways, or even in the worst cases, I need you to do something. You buy services from me. I have seen cases where an angel investor comes in and say, this is X amount of money I'm going to give you and then in practice, they don't say probably exactly in these terms, but they say that, okay, you're going to buy services from me.

[1:54] And then suddenly and surprisingly, the amount is close to the total amount you're getting. Maybe there's a bit of a time delay, but basically, the concept is that they will get the money back in revenues from you and they still have the stake in the company. Sometimes it's some other favours, something else. And this leads to ethics. How does it feel? How does it sound? How is the investor? Do a bit of DD, due diligence on the person. How is their background? What type of people they are working with? Whom they are associated with? Because when the times are good, everybody's more or less happy.

[2:47] But when it gets tough then the true colours will come out and this is what you want to find out beforehand so you know what to expect, how to handle, are they working with you or against you, or are they actually ghosting you? Are they leaving you in trouble or are they working towards a solution and contributing to building the company in the long-term? It's important that the ethics part is working. Your values, missions, objectives, expectations are aligned, and also the time perspective that they expect to exit, whatever that is, to be in pretty much in the same terms as you see the world.

[3:37] Otherwise, you may run into trouble a bit later on because they have some other expectations and needs, and that may not work for you. I would be really concerned with the ethics part, understanding, taking the time to think about and understand the person, have long discussions on how they do things. And while you are having those discussions, please listen, observe. Let the investor do the talking, let their deeds do the talking, let them show by the actions they have already taken what type of investor they are. Then ask from those companies, those founders they've been working before. How do they feel about the investor?

[4:30] Even a better case is where the end outcome of the company, to venture was not a successful one. If the entrepreneur is still embracing and they are still good buddies with the investor, I think that's a really good sign that that's someone you will want to be working with. This is now approaching more of the competence side. First, there was this mission, ethics, values. It's the most important thing. And you have to think about also what are the limits where you want to stop? You don't wanna cross the threshold, going to the other side. And now the technical aspects of your investor.

[5:24] Do they understand what you are doing? Are they in the industry? Do they have the domain, the business understanding of the area you're working with? That's quite easy to get some a quick rule of thumb measurement by just talking with them. Are they contributing to the discussion? Are they thinking creatively? Can they actually help you to do something in the future? Are they helping you to solve your issues? Can they actually give you feedback, ideas, something which you think is valuable which is showing that they really know what they're talking about, and they really understand what you're doing?

[6:14] If not, that's a sign as well. Don't expect that to change the future. What is their background? Are they coming from a similar type of industries? Maybe not exactly the same, but they know the dynamics of the software business, for example. They understand the hardware business. They have been there. They understand the distribution, the revenue and business models, industry cycles, and all these fine details which really matter because the journey is never an A-to-B straight line. It's curved, warped, mixed, twisted, weird spaghetti type of a journey where things don't go as planned.

[7:08] There's another proxy to get this domain understanding from another aspect. It could also tell something about the investor or their approach if they are an institutional investor. Are they treating you as a financial investment? Are they looking at numbers? Are they thinking you as a risk or portfolio allocation? There's nothing wrong about thinking about the revenues, the profits and the risks. That's what you need to do when you do an investment. But if they don't want to understand the business model, the business aspect of your company what you are doing, building and they are not contributing to that they are more focused on the numbers.

[7:59] Okay, what are your revenues next year? How are you going to grow them? What is your margin? And if this is more the type of discussion then I think it's an indicator that they don't either have the knowledge, the will or they have some motivations why they just focus on the financial aspects. This is also usually not a good sign unless you really are looking for that type of investor because when the going gets tough, and it well, they tend to be more rigid. They stick to their proceeding rules, allocations and risks because that's what they understand.

[8:50] Those are the tangible things, the numbers. It's more comfortable to stick with those and then it's easier to say that, well, I understand that your in a tough position but we only have an allocation for this. Or we don't wanna go because of this or that or whatever. So they're not flexible. They don't properly understand that it's over and beyond your control, if something like corona happens or whatever the industry dynamics and you need something from them. Or you need help from them, or you need them to change something in order to get other investors to join the journey. They need to maybe give up a bit of some something you already have given to them beforehand. When you have someone who actually really understands the business, it's easier to deal with these type of situations because they look at the long-term.

[9:44] They understand the long-term benefits and where the actual money is. It's where you have a successful company and it's not just hitting the next whatever weeks or months milestones rigidly. Then there's an investor journey as well. And this is how experienced are they as investors? Is the person just starting as an angel investor and you're the first investment. Is it a person who just has a bit of money and wants to try something and is not actually an angel familiar with the growth companies, startups, and really don't understand or know what to expect and they just love the idea, or they know you personally and they want to help you?

[10:50] Or is it a new VC fund, a first fund, first time VC partners, and they don't have the experience and depth what somebody else who has been doing the full cycle has been having before? When you coming to the situations where you need to do something and often you need to ask something from your investors if they really are your partners then you come to realise that they are persons as well. They have their fears, insecurities, ego issues, ignorance, power plays, all those things.

[11:44] Hopefully, not all in the same person. If you have a bunch of investors in, it may only take one to spoil, not spoil, is it spoil? I don't mean it in a positive way, to ruin. That's the better word I'm probably looking for ruin the atmosphere, the cooperation, the team spirit what you need to get somewhere. It is not uncommon that one investor or sometimes even a few of the investors use whatever hardship and they take the company, the other investors as hostages. Using it as a leverage for them to get a better bargain.

[12:45] Renegotiate whatever is in the table, or they want to gain something more than what feels like the right thing to do. I can assure you if you working with someone who does that, when you are in a tough position, you will never forget that. That's why I'm saying that if you ask from those founders who have been working with some investors and they've been going through a tough patch, and if you manage to open them up, you will get really valuable information how are the through colours of the investors in tough spots.

[13:39] You may positively surprise if they're really pro and they understand what they doing and the name of the game with risk investments, venture investments, high tech startup investments. So they accept that it doesn't always go the right way and that's acceptable because that's the name of the game. Only a few will succeed. And they will take it that way with the big boy pants on, big girl pants on. It makes it more tolerable. Even though, failure may be the end result. But if somebody takes advantage of you and then you'll succeed, you will never forget.

[14:32] And you don't want to have that experience. This is why I'm making this video. You'll want to avoid those things. You can avoid this type of hardship only by selecting the right partners. Doing the choices, the preparation, due diligence, the work beforehand. Because when you have somebody in it's harder to get rid of them. It's costly to buy out investors and sometimes there can be lock-ups in situations or it just becomes so hard or tiresome or stressful to cope with investors who are just looking their self-interest at the cost of everyone else involved.

[15:38] And this is something which happens. So keep that in mind. It is not that people are ill-intended. It's just that everybody has their journey and we're learning along we go. In order that you are not the one who is helping them to become better, it's good to pick your battles, find the right type of investors and do business with people that is enjoyable because it's about the journey and the end results may come as they come and when they come, but it's not up to you, entirely. Leave your comments on what do you think.

[16:28] Is there some aspects that you would like to know more? Let me know, till next time!