The new year is right around the corner, which means one thing for business owners: a fresh start and new opportunities. For growing ventures, an abundance of money is certain to be a widespread New Year’s resolution. One of the hardest parts of starting a business is getting funding. But even harder than finding the money is figuring out who the source of funding will be and how you can best utilize their investment.
Finding the perfect investor is a challenging task every businessperson faces. Investors invest in you, for your innovation, dedication, and imagination – it’s not only about the success your business has had up until that point. However, it’s equally important to find an investor that’s just as enthusiastic about your venture as they are about you and your team. As we evolve into an age where money is more expensive than ever, it’s essential to discover the perfect investor for your business.
Think of your investor as your ‘significant other.’
First things first: investors not only provide funds, but also give advice. Similar to the philosophy of someone entering into a relationship, investors don’t want to waste their time – and money – on a relationship that turns sour. Before signing the check, investors should express sincere interest in you and your company. They should want to know who you are, what your ambitions are, and where you plan to drive your venture going forward. As your relationship develops, your financier will become more engaged in the success of your business and help you navigate and execute your goals within the industry.
Support plays a crucial aspect in the investor’s role. You’ll want tremendous support through the good times, but even more through the bad. You will want insight into how he or she will react in difficult situations because as a startup, you will experience your fair share and they can get ugly.
Your investor must know the industry.
You want an investor that has devoted his or her own time to the industry you are seeking to change. Think of it this way: you are starting a brand new clothing line and an angel investor approaches you that has dealt exclusively with the bioscience industry. While the money would be a huge advantage, his knowledge of retail is not. Therefore, your venture would not grow as well as it could and as such, neither will you.
When looking for someone to take a stake, it’s worthwhile to search for someone who knows your customers, partners, and people in the ecosystem of that industry – one that can provide you with the knowledge and connections to further expand beyond the initial investment. And when it’s time to raise more money, you want an investor that knows the industry both locally and beyond.
Long-term is worthwhile.
Nowadays, there are many investors that are looking to “cash out quickly.” In many circumstances, this is not preferred. In the short-term view, his or her heart is not invested in you or your business. Someone who is “in it for the long haul” is going to have the dedication and devotion to help you succeed. Long-term investors will also want to work closer with you – to discuss milestones, get advice, and talk ‘offline’ in an informal setting.
Unknown investor? No reference check? Say no.
An investor’s transparency is just as important as yours. Investors need to be visible to their potential startup investments – you need to know their background, philosophy, and past investments. If you can’t look into their history, skip it.
It is also wise to avoid an investor that is unknown to the startup industry. This is an important consideration that can be overlooked when money is being waved in your face. Take this example: you take capital from an unknown investor, say in Nevada, and it comes time for a round of VC funding. A VC based in Boston may not want to work with an angel in Nevada because it is difficult to work with someone unknown. Having a foreign investor can be an especially huge turnoff for a VC because investors like to work with others they are familiar with. And when things get messy, this places the future of your venture in unnecessary harm.
Everyone wants equity. Watch who you sell it to.
The cost of money is expensive and equity is just as valuable. Realize your milestones and goals. If you don’t have to give up equity, don’t – it’ll be valuable some day. Always ask yourself what you’re worth. If you are offered 200K and the investor wants 50 percent equity, you must question whether you are content giving up that much of your company. But understand that at some point, you’ll more than likely have to give up a large sum of your business if you want the big money to flow in.
An investor that believes in you and has your best interests at heart will be able to guide you through the startup world. Understand how much money you need, when you need it, and how you’ll spend it. When all you need is cash in hand, make sure the terms align with that. As a final rule, always look at the investor’s history to get a better feel for how they can help you succeed.
Bob Lentz is the Entrepreneur-in-Residence at Northeastern University and Chairman of IDEA’s Advisory Board. Bob served as interim CEO at Digital Reef, CEO and President of PermissionTV, and is on the board of directors for Monotype Imaging Holdings, Inc., eCopy, Inc., and Lumigent Technologies.