How to Effectively Evaluate Different Potential Investors
Whether you’re preparing to launch your new startup, or you’ve already established your small business and you’re searching for funding that will take your company to the next level, finding an investor can help you achieve your goals. With so many startups making it big in recent years, finding an investor may seem like the missing link to finding startup success. In your efforts to meet the right investor, consider the following advice.
1. Analyze the Legality of Each Investor’s Business Practices
Many entrepreneurs jump at the chance to work with someone that promises to fund their companies, but this can be dangerous. Being overly eager to accept funding can land you in legal trouble. When working with an investor, make sure that each person complies with all legal obligations.
2. Perform Unconventional Reference Checking
Startups searching for the right investors need to go above and beyond when performing their research. While most people typically only provide the names of references that will give them glowing reviews, it’s important to dig a little deeper. Ask all investor candidates what situations left more to be desired.
Dig into these situations to glean as much information as possible. This type of research is very telling about each investor’s character, work ethic, and practices. Learning the good and the bad about your potential partner will give you the tools you need to make well-informed decisions.
3. Determine If an Investor Will Make a Good Partner
Choosing an investor goes beyond finding the first person that will agree to bankroll your business ideas. Beyond the money, the right investor will become your partner. Go into your investor search with the mindset that you are building your business with this person. This will allow you to analyze them more critically to learn if they are the best fit for you.
Many startup owners make the mistake of choosing money over compatibility when looking for an investor. The truth is, no amount of money will make working with someone that you don’t like or respect worth your time. As you vet each investor, determine the level of compatibility and respect you feel. If you feel that you and the investor are not a good match, don’t try to force a connection.
4. See If an Investor is Equipped to Fill Your Startup’s Value Gaps
Investors are brought in to fill specific value-gaps in a company. While they are responsible for contributing money to help fund your business, their role in your company goes beyond that. The specific value-gaps for your company are those that are slowing progress.If you’re planning to work with an investment firm, determine if they have team members that can help fill these value-gaps.
If you’re working with an individual investor, consider whether you stand to benefit from their customer relationships or partnerships. Moreover, ask questions like whether the investor understands your industry and business model and if they have a proven track record in your area of business.
These value-gaps allow you to see exactly what you need to move your business forward. While many startups stand to benefit from a financial contribution, the fact remains that a true partner in every aspect of the word is far more valuable. In your search to find an investor, look for someone that will do more than fulfill your next round of funding.
5. Analyze What Level of Commitment They Can Give You
As you research potential investors and a future partner, be sure to analyze their level of commitment to your business. The right investor for you should be someone that is able to play an active role in your business as they will be joining your board. As such, it’s important to determine how much time this individual or firm will have to devote to your company.
In analyzing an investor’s level of availability, ask how many boards the investor is currently serving on, what type of communication protocol is expected, and the level of interaction that they expect to have. Additionally, it’s important to learn what their expectations are when it comes to your responsibilities and how much control they hope to have in your company. It’s best to choose an investor that is freer with their time and advice as you are the customer and should ultimately decide how much of the time you require.
This example about Fisher Investments should remind any founder to look for investors that go the extra mile with their market research. While Fisher Investments doesn’t work with venture capitalists, resources like Crunch base can provide insight into VC. This shows that an investor is competent and committed to making research-backed choices with their investments, making them an ideal fit for your business.
6. Determine the Time Horizon for Investments
Though startup founders may have a pressing need for quick funding, it’s in most founders’ best interests to focus on finding long-term investors. This type of lasting relationship is better for establishing a more permanent capital structure for your startup. While there may be a sense of immediacy to your search for the right investor, don’t let that distract you from performing the necessary research.
Learning details of the time horizon for investment will help you gain a better understanding of the quality of the investment you will receive. As most investors have limited lives on their funding, entrepreneurs must ask the right questions to see what a good fit for the future of their companies will be. Learning about the lifespan of the investment will give you better insight into the time horizon of their investment.
Before jumping in blindly and agreeing to work with an investor, make sure you’ve properly vetted them. While funding may significantly help your startup, it’s important that your investor of choice is the best person for you to work with. Apply these strategies as you continue to analyze prospective investors.
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