getting into bed with the wrong investors

4 Tricks To Avoid Getting Into Bed With The Wrong Investors

Linkilaw Business Finance, Legal Advice

What can you do to ensure you find the right team and avoid wrong investors?

People do business with people, and mostly, people they like.

As entrepreneurs, we believe our people instincts are pretty fine-tuned. But when you’re raising cash for a hungry startup or scale up, and the cash flow runway is getting shorter by the day, it’s easy to be tempted away from gut instinct and move towards hard cash.

This is how so many friends and colleagues have ended up in bed with the wrong investors. How do you navigate that difficult path?

[tweet_dis_img]It's far better to buy a wonderful company at a fair price than vice versa.[/tweet_dis_img]

(1) What Makes “Wrong Investors”?

You may not have the best fit with your investor – be it personality, background, even lack of sector expertise, but these can often be overcome.

But if the motivation is wrong – if they’re just looking to offload funds before end of the tax year, for instance – you’ll find it hard to get the conviction of an investment partner who genuinely believes in you and your business.

Other signs can be when you hit that inevitable start-up “trough of despair”: will they offer the right commitment, support and input? It’s easy to be supportive in the optimistic glow of a fundraise but you need to make an assessment of how they might react when things get sticky. How did they deal with any tricky issues during your negotiation?

If investors bring little value other than cash, you may want to reconsider them as ideal partners going forward? Can they also bring advice, mentoring, industry expertise, an incumbent network? Think about the long-term too. Can they provide follow-on funding or will you have to go through all this again?

(2) Beware The Signs

One of the key signals is delay, delay, delay. Beware of investors who lack clarity about what they want from you and/or suddenly start rushing you into last minute, and unfavourable terms.

Compare your investor’s terms with others and conduct your own due diligence on their previous investments. Ask them for contact details of investee companies and get in touch with them to find out their experience. Again, any points of resistance from your prospective investor and you need to raise the question, why?

Also ask the question; what happens if you run out of money?  What’s the follow on or strategy for further assistance?

(3) Avoid The Temptation To Take The First Offer

Think about it. Investors will be bombarded with the good, bad and very ugly of business plans. They have to sift through bags of noise, before pinning their investments on the few ideas that stack up and have a fighting chance of survival.

Because of this, they can adopt a perfunctory and “flight stacking” approach to expectant startups, creating a clash of expectations with the entrepreneur, for whom every word and glimmer of funding hope is seized upon. This often looks like a poorly dressed-up investment offer.

Investment has to be about taking your business to the next level – and the level beyond that.

[tweet_dis_img]Be 100% clear about what you're looking for when approaching investors.[/tweet_dis_img]

When it comes to approaching investors, be 100 per cent clear about what you’re looking for. Where will £XXX take your business? What’s the phase after that? What’s your one year/ five year/ ten year plan? Investors worth their salt will be seeking this total clarity and vision from you. And they will understand if their offers don’t match up to this.

(4) Finding The Good Guys

So how do you find the good guys to do business with? Know your game plan from the word go.

Aim for at least two funding options and some competitive tension. Share any concerns you have and see how they react. Remember the point above: it’s nice to be nice when times are easy, what happens when you resist?

Are these investment partners you feel good about having on your board? Do you believe they will increase your opportunities for success beyond being a financial resource? Your instinct could be your best guide here.

Finally, question again why you need the funding and don’t get tunnel vision about how to raise these funds. Keep exploring all options and please don’t presume a weak offer is your only option.

Remember, you can always say “no”.

Article originally written by Andrew Weaver for our friends at Real Business

wrong investors