By Abhi Golhar
We all know what it’s like trying to get investors on board. I have had my fair share of challenges and I promise you, it's possible to make sure that you are not ensnared in a cycle of failure by choosing the wrong ones. It’s not always straightforward, and there are several factors that can significantly impact your business’s ability to succeed when selecting investors. Here are three things to look out for when meeting (and speaking with) investors before making the decision to invite them into the bigger picture:
Your Intuition Says 'No'
Have you had the feeling that something was wrong? As an investor in real estate, I rely on my gut feeling in making vital decisions for my business. If you get the feeling that someone you’re about to go into business with might not be the right person you’re looking for, do not be afraid to say "no." Having an inner voice that guides your decision making, especially when you’re about to start your first business, is a beneficial resource.
An investor flew in from abroad to look at our business model with the objective of deploying equity. We spent a few days touring our real estate projects and answering questions. During our time together, he made comments about his expectations in terms of equity, operations and project management that did not fit well for the future growth of our company. Specifically, he required a large ownership of net profit of each project and equity of our business.
The rest of our meetings went fairly well, but one thing that stood out throughout our conversations were the comments he made regarding terms of his capital. This was the antecedent to our decision to turn down the investor’s offer of a $5 million equity injection. Not only did his comments show that he did not understand our business and that he may have been a bit greedy, but we had a gut feeling that it just would not work out. It didn’t feel right.
They Don't Have Clearly Defined Objectives
There are two things that bug me the most about investors: insufficient knowledge about the industry and opportunity they will invest in, and unclear investment objectives.
Insufficient knowledge doesn’t make sense to me. The stock market is a good example. It’s easy to throw investment dollars at a ticker symbol. But are you really doing the necessary due diligence on the company’s financials and joining conference calls to better understand why the company’s stock is a good investment? For most, the answer is no, when in reality, the answer should be yes.
Every opportunity is different, and therefore, investors must know all of the nitty gritty details from start to finish. From the onset of a discussion, if investors are not inquisitive about your business model, the people behind it, financials, business development goals, operational protocols, etc., count it as a red flag.
Investors who do not have clearly defined objectives is another red flag and generally means you're working with a novice. Without a clear plan on capital structure, amount and terms, novice investors have a tough time pairing themselves with the right opportunities. Vet your investors thoroughly and stay away from those who are too green.
They Fail to Prove a Business Model
Anyone even thinking of starting a business has a plethora of information on choosing the best and most effective business model, customer acquisition strategy and revenue generation ideas. I emphasize the importance of evaluating the position of your startup and deciding whether there is sufficient revenue, a defined customer base and a solid business model. In other words, make sure that you have it together and have a successful model to run with.
You most likely have no business taking on investors if you cannot get your startup converting customers and running smoothly. For instance, investors who demand a lot of equity would not make sense for a company that does not have its revenue secured. During my years as an entrepreneur, I have always ensured that I had my business model figured out and consistent, proven revenue long before I approached investors. That one method has nearly guaranteed my success in my businesses.
These are, of course, just a few points that personally stood out for me as an entrepreneur of many years. There are other factors that business owners should look at when taking on investors. Making mistakes with investors can get very costly -- and not just financially, but for your overall brand.
Abhi Golhar is the Host of Real Estate Deal Talk and Managing Partner of Summit & Crowne, a real estate investment firm in Atlanta.