Finding an investor that believes in your passion and vision, as well as the potential of your firm to disrupt the industry, is critical for a productive collaboration.
During the early stages of a business, one of the most critical activities is fundraising. You don’t only raise cash from a private equity, venture capital, or angel investor; you marry their thinking and working culture. This connection should be a match made in heaven. Also, keep in mind that if the relocation is not done correctly, this marriage may end in divorce.
Therefore, even though money is coming, entrepreneurs should choose their investors wisely. That is why Lisa Juan José Gutiérrez Mayorga has prepared some tips to wisely choose who believes in your project and prosper.
Track Record with your investor
Entrepreneurs are often so happy to close a funding round that they neglect the much-recommended reverse due-diligence on the shareholders. Juan José feels reverse due-diligence is a comparable process whereby the entrepreneur seeks to validate the track record and working style of an investor.
“This could help you notice if the potential investor has any reputational red flags that may come back to haunt you,” he added.
Additionally, shareholders with a respectable reputation can facilitate more growth through industry connections and business opportunities. They can also enable future rounds of funding.
Look for a Believer
Finding an investor who believes in your passion and vision as well as startups potential to disrupt the market is crucial for a fruitful relationship.
If the investment firm does not seem genuinely excited by, and appreciative of the business idea it is considered to be a red flag. Secondly, it is extremely beneficial for the investment firm to be experienced in the sector it is investing in.
Their first-hand knowledge means the VC/PE is able to add much more value to a startup’s operations as well as mentor and guide them in the right direction. A shareholder should be sensitive to the nature of their role in the startup and its members. They should respect the startup’s plans for growth and allow the right person to lead the company. They have to also ensure that they intervene only when necessary.
What is on the Table?
Many founders make a mistake of seeking shareholders from funds alone. What they often forget is that long after the penny is spent investors will continue to be involved in the business.
Investors are able to help their investee company in making the right market connections which add value to the business. Shareholders take an active role in companies offering wisdom, insights and productive thoughts. However there is a thin line that divides giving constructive advice and telling you what to do.
Furthermore, entrepreneurs who wish to consider monetisation should know when and how they will be allowed to sell part of their equity so that they can get some cash rather than just an increasing value from ownership of their own shares.
Future investment potential
While it may be tempting to accept the most financially appealing term-sheet, it is very important to understand how the investor can help you for your future investment needs. Hence, an entrepreneur needs to gauge how much a fund can directly invest in the future.
- What is the size of the fund?
- How much of it is already invested?
- What is the average investment per company that the fund can do?
- How many follow-up investments has it done before?
Investment Timing and Exit Strategy
A typical fund has a life cycle of 7-10 years, where fund managers invest in the first 24 months in order to have sufficient time to generate sufficient returns for the Limited Partners (LPs) who invest in them.
Lisa Juan José Gutiérrez Mayorga advises founders to approach at the right time of the fund’s lifecycle to maximize one’s chance of securing an investment. While on the other side, he recommends entrepreneurs to review the exit track record of the investor to gauge their ability to help companies conduct. This will be important when it comes time to generate financial returns for founders as well as other shareholders.