Not unlike a marriage, the type of investor(s) you partner with will greatly influence your trajectory as an organization, and sometimes on a personal level as well.
Making the decision to bring on an Angel investor, VC, or any other kind of investor is one that should not be taken lightly. This is arguably one of the most important decisions you'll ever make as far as your business is concerned.
Not unlike a marriage, the type of investor(s) you partner with will greatly influence your trajectory as an organization, and sometimes on a personal level as well. Remember, these are folks with who you will spend countless hours. Your level of comfort is very important.
You will want to be in business with folks you, at the very least like being around.
Most entrepreneurs view investors as just sources of money. I often encounter folks who seem to believe that an investor is one who simply provides the cash needed and stays out of the way. I actually make it a point not to invest in any business unless the founders are open to hearing what I have to say about their business model, industry, and so on. I am typically not looking for them to take and adopt my ideas, nope! I just want to make sure that these are folks who are open to new ideas.
1. Are you looking for an investment of time and money?
Be clear with yourself about this particular point even before you go out to solicit investment capital. Also be sure to communicate with any potential investor as precisely as possible about what you expect in this context.
Ask them if they are able to also avail themselves from time to time to serve as a consultant to you and your team. Most institutional investors have spent years in the field gaining operational and strategic experience in many industries.
The average investor would have also devoted a considerable amount of time cultivating valuable relationships with bankers, lawyers, and other entrepreneurs. Be sure to position yourself to be able to tap into these resources as often as possible. And an investor's willingness to facilitate your exposure to their contacts and wisdom should be a prerequisite to be able to invest in your company.
The good news is, most investors will be more than happy to introduce you to as many people and organizations as it takes to help you succeed.
2. Expectation of expertise
Beyond money, what does, or will your company need that you believe Someone, or folks in the investor class can provide? As I have said before, a percentage of Angel investors and Venture capitalists invest in areas in which they possess years of experience and expertise. According to a recent survey by Tech news giant, TechCrunch, general partners at top-tier VC firms often have experience as founders or senior executives at entrepreneurial companies. On average, 40 percent of the current partners at high-performing investment houses are experienced entrepreneurs, and almost one-fifth of them are former C-level executives at startups.
You and your company can be the beneficiaries of this indispensable cache of resources. Ones that transcends money.
I would advise that you carefully assess the existence of these post Series A needs, and make a determination as to which mix of expertise and / or experience, along with cash that you will need going forward.
3. Time horizon
It takes time for most businesses to get started, flourish and reach its full potential. There are no overnight successes in business, despite what the media tries to tell the rest of us.
Facebook was a 10-15-year overnight success story. The average time between a deal and exit by a VC is between 8 - 10 years.
The idea that starting a new company, that is if you intend to grow it into any respectably sized firm, takes time, should be one that you are used to. This message should be delivered precisely and clearly to any new partners you decide to bring into the fold.
Yes, most, if not all investors go into partnerships with Startups with the clear goal of some kind of future exit. Often times, this ambition on the Investor's part will be clearly stated in any term sheet presented.
That is the nature of any deal. Unless you come to some sort of alternative funding arrangement, any VC or Angel investor will, at some point want to cash-out of the deal.
What you need to be on the same page with any potential investor about, however, is how long either of you expects it to take to be able to realize said exit.
This is one of those critical issues you will not want to assume or shy away from before, during, and after any deal is struck
4. Portfolio companies
Aside from individual investors, Angels, friends, and family. Most institutional investors go out and raise funds for the purpose of investing in other companies. The way it works is that these professionals -Venture capitalists, private equity guys, and gals solicit cash from high net worth individuals, financial institutions, and other funds. They then pour this new cash haul into specific startups. The money guys get a fee (from investors of their funds) for their expertise and a percentage of any profits realized as a result of an exit.
Most Investors select certain industries and markets to invest in. It is not uncommon for a single investor to have their hands in multiple companies in the same space, at the same time.
There are various schools of thought out there as to whether these kinds of situations benefit the Startups being funded, or do these arrangements merely serve as a way for institutional investors to hedge their bets in any particular industry.
Some believe that entrepreneurs can benefit from the shared wisdom and familiarity with any potential issues anticipated as a result of these types of situations. Others don't seem to think any one company stands to gain if their VC partners simply see them as a financial instrument.
Either way, this is a question you want to ask any potential investor before you finalize any arrangements. If the answer is "yes, we do have other companies like yours in our portfolio", I suggest taking the time to meet with the other founders and see if this works for you.
5. Followup funds
No long-term investment takes a single lump sum of cash. I know this is how most folks thing it works; You go into a meeting with potential investors, you say you need $1 million to go from point A to B, the Angel investor or VC writes the check and that's it. You go out there and everything happens exactly like you thought it would.
The truth is, it is almost a statistical impossibility that stuff go according to plan. Most startups, beyond the Seed capital stage, will require four startup funding rounds: Seed, Series A, Series B, and Series C.
During your negotiations with your potential investors, you will either underestimate the amount of cash you really need, or how much it will take to build your business. You will more than likely need to raise more funds at some point.
This is a reality most folks with experience are all too familiar with. You need to know if your new investor is open to providing additional funding in the future should you need it, and what their terms will be.
Will they be willing to invest at the company’s book value at that time, or will they look for any special considerations?
You want to, along with any consultants you bring on, have this conversation with any potential investors before you commit to any deal.