11 Feb Finding The Right Investor
If you’re a small business looking to expand, investors willing to contribute capital may seem like a godsend. However, before taking on any investments, it’s important to do your research on who may be investing in your business. Gaining access to capital is never a “no strings attached” agreement. Money is complicated. It has the potential to help companies out of a quagmire, yet it can also harm business relationships. Here are some suggestions to look out for prior to taking on an investor:
View the Investor’s Portfolio
You have to see what they have done in the past. While you’re the one who needs capital, you still have to make sure their prior investments are trustworthy. Most investors should have a lengthy portfolio with successes and occasional issues in the past. Ask them how they have supported previous companies, beyond monetary needs. Having an investor who is sincerely interested in your company is crucial. You don’t want someone who will just write you a check.
This is very important – you have to know the type of person you’re dealing with. If someone hands you $50,000, you can’t expect them to be completely hands off; however, you don’t want them to call and email you 3 times per day. If your potential investor has invested in prior companies, then contact the CEO. They should give some insight as to how well things will work out.
Look at Similar Companies
If you know of a company in a similar industry, of the same size who’s taken on an investor, then see how it’s worked out. Talk with people at the company about what worked and what didn’t. People love talking about their business. While talking about money can be tricky, many business owners can relate to one another and want to help a non-competitor out.
Hire an Attorney
Attorneys can offer much more than simply drawing up contracts. They can advise you on investment terms, which is absolutely crucial. If you value your company at $1,000,000, and you get a $100,000 investment – don’t simply give away 10% of your business. Additionally, don’t make a promise you can’t keep – if your annual revenue is $200,000, don’t promise to pay them back in 6 months. Attorneys have the ability to be objective and help set realistic expectations.
Avoid Friends and Family
Friends and family members may seem like great people with whom to work – you know them, you get along with everyone (well… hopefully), and you can trust them. However, most times, relationships and business don’t mix well. You don’t want to ruin a multi-year friendship over a poor investment decision.
Be Cautious of Private Equity Firms
Angel investors and private equity firms can be great for the right company – those that plan to grow quickly and exponentially. Additionally, they can offer an impressive amount of money – however, be very cautious. They typically set unrealistic expectations and often times have terms that are very unfavorable for the business.
Ultimately, you’re the one in control. It’s your company, so you can and should dictate the terms. Don’t simply jump on the first investor who offers money. Do some research, talk with people in your industry and figure out the numbers. You want to find an investor who believes in your company and has the skills to help your company grow.