Many entrepreneurs don’t have enough capital to start a business from scratch without help – that’s been true for some of the greatest companies and startups of this generation. These people look to investors for that help, and thankfully, there has been quite the trove of financial resources from the private financial sector to go around these past two decades in particular. But that doesn’t mean entrepreneurs should blindly accept investment capital because it’s readily available. Just like any big decision, without doing your due diligence and planning for the future, the result can be an entrepreneurial catastrophe.
It’s essential to take the long view when it comes to business. For this reason, I encourage entrepreneurs to think of investors as partners in your journey rather than as assets. Not only is that the smart thing to do for your business, but your investors also will be happier if they’re involved from the beginning. There are a number of things you can do to ensure both a successful business and a set of happy, fulfilled investors.
Pick Investors You Feel Comfortable Trusting
Any business that begins without a two-way thoroughfare of trust is doomed to fail. You need to find people who believe in not only you but also in your product or service. If your investors balk at the first sign of trouble and pull out, you’ll be out of luck with no recourse. Never forget that you are beholden to them, too, and always strive to give them more reasons to trust you.
Pick Investors Who Are Forthright
It’s imperative to be able to talk to your investors freely when something goes badly. Both of you need to feel comfortable with tough discussions and know that each of you is in it for the long haul. It goes back to trust. If you and your investors trust each other enough to tell it like it is no matter what, you will be able to fix almost any problem. Transparency on both sides of the equation is key.
Be Absolutely Clear
Investors need to know what they’re getting into when they sign the checks. Again, it comes down to trust. If you hide something from your investors just to get the cash up front, it’s bound to go very poorly for you when the investors find out the truth. To begin, you need a sound and comprehensive business plan that’ll show your investors not only what the projections are for their return on investment but also how you plan to get there. You also have to be honest about how long it’ll take them to make back their investment to begin making a profit or find a positive exit.
You will be more successful if you have the perspective of people from both different industries and walks of life on your investing team. Each person has unique experiences and can contribute something different to the enterprise. Also, when you’re diversified, you show that you have the faith of people in multiple industries, which will make it easier to attract new investment in the future, should that become necessary.
Do Your Due Diligence
In much the same way as your investors want to know all about you before handing over the cash, you must be equally thorough in checking over your investors. Does their investment portfolio reflect the kind of business you run or want it to become? Are there any synergies between those other companies that could lead to potential partnerships or alliances down the track? How successful has the investor been in working with companies at the same critical stage yours is at, whether that be during the seed stage or much more advanced with a Series A, B or beyond? Can your investors connect you with external strategic partners that can help you with other areas of your business?
The best indication of future performance is past performance. Despite an investor’s reputation, honesty, and deep pockets, if everything that investor touched hit the wall within six months, it might not be a good idea to form a partnership with that person.
Pick Investors Who Share Your Passion
It’s easier for someone to get behind something in which he or she believes. If possible, do some networking for a few months or even a year before seeking out investors. Find out their wants, needs, and beliefs. This ties back into due diligence. Although it’s not really “vetting,” it’s finding out which investors are the best fit for your company and your vision.