But before you latch onto any investor who looks your way ...
By Pauline Muindi | May 20th 2020
Picking an investor for your business is one of the best ways to boost your capital investment.
But as much as you might be desperate for the money, choosing an investor for your business should never be a rushed decision. Finding a business investor is about more than just money.
Right off the bat, you must make sure the investor you choose is someone who believes in you and your vision. It is also best to go for someone who has experience in the industry. This means the investor will have a keen understanding of the challenges ahead of you and help you navigate them successfully.
As important as cash investment is, the ideal investor provides more than that.
As Alejandro Cremades, the author of The Art of Startup Fundraising says, “Your investor choices can either destroy your dreams and turn them into nightmares, or breakdown numerous barriers on your flight to your full potential.”
When you sign a deal with an investor, they become part of your business, and it is for the long run. Think of it like choosing a spouse.
In fact, in business circles it is often said that it’s easier to divorce your wife or husband than to divorce your business investor. This only emphasises how much thought you need to put into choosing an investor.
It is important that you choose the right investors right from the beginning. Even the smallest amounts of initial seed funding from friends and family can have a huge impact on your business.
For instance, the terms of agreement with your initial investors can determine who you will be able to attract for subsequent rounds of funding and the terms you’ll be able to dictate.
So even when borrowing Sh20,000 from a friend or relative to start your business, make sure you have a clear agreement.
With that in mind, here are some key factors that should be on your checklist for finding the ideal investor for your start-up.
1. Investigate them
Before signing any contract with an investor, you owe it to your business to do your due diligence. In simple words, due diligence is an investigation of the investor before doing business with them.
Just like you wouldn’t buy a car without checking out the contract and comparing prices offered by other dealers, you shouldn’t go into business without properly investigating your potential investors.
Find out what kind of reputation the investor has in business circles. Do they go back on their word? Have they been sued by other business owners and if so, why? What is their vision in business? Have businesses they have invested succeeded or failed and if so, why?
Talk to other business owners they have invested in, their business partners, associates, and even employees. Take your time to look under every rock to ensure you’re making the right decision for your business.
2. How deep are their pockets?
You don’t want to waste time pitching to investors who don’t have the money you need for your business. Therefore, do your best to discover a potential investor’s financial situation. When was the last time they invested in a new business? How well are their other investments performing?
You don’t want your start-up to be the only hope for the investor – that will be too much pressure on you and your team.
It is also smart to have someone who has enough money for other rounds of funding. You don’t want to spend time looking for other investors during every round of investment. Not only is this time consuming, it also dilutes your company’s ownership, making it less attractive to other investors.
Even after ascertaining that a potential investor has the required funds, find out if they have a habit of participating in future funding rounds. It is a plus if they have close friendships and partnerships with other wealthy and influential individuals.
3. What more do they bring to the table?
Finding an investor with deep pockets is great for your business. But something you shouldn’t overlook is finding an investor who brings other resources to your business.
For instance, if they have investments in businesses that can add value to your start-up, this is a big advantage.
An investor’s networks are every bit as useful, or even more useful, than their money. The ideal investor is an industry veteran who comes with priceless networks that will help your business attain success. Go for an investor who has considerable people and business resources that can help in developing leads, forming alliances or finding suppliers.
4. How committed will they be to your business?
An investor’s level of engagement and commitment to your business is another factor you shouldn’t ignore. Have a clear understanding of exactly what you’re looking for. Is it a bigger network, more expertise, money, or all three?
Different investors will give you different levels of engagement and fulfil different goals for your business.
When you are in the initial stages of business, you need an investor who is willing and able to give you the mentorship you need to succeed.
Consider these key questions: does the investor want to be involved in the day-to-day operations of your business or take a hands-off approach? How does their vision for the business differ from yours?
Also note that some investors might want to bring in their own person into the business as a chief financial officer to help you manage the business.
Have a clear understanding about this before signing a contract.
In the initial stages, your best bet is angel investors. Although they don’t have the breadth of resources you’ll get from venture capital firms, they might give you more time investment. Angel investors are also known to be more lenient with their initial requirements.
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