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.
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.