Finding Investors

July 27th, 2009

Your investors, their investment history, their experience in your field or with companies in your stage of growth, what role they want to play, their risk/reward appetite, how and when they want to cash out, their personalities, how you’re going to work together, and whether you just plain like them will all be issues in your success or failure.

When someone invests in your business you might as well exchange rings because you’re going to be together for better and especially for worse. By comparison, divorce from a private investor can make a marital breakup look like a picnic in the park. And if you do actually manage to break the relationship you’ll wear a scarlet letter for years that will send potential investors scurrying for the safety of their mutual funds.

So be sure to consider the following issues when you’re evaluating a potential investor (we review them in detail in the Finding Money ebook).

  • History
  • Experience
  • Life Cycle
  • Role
  • Risk appetite
  • Exit strategy

Be sure you clearly spell out the rules of the game. And remember, you may be new at this, but your investors probably aren’t. Who’s going to run your company? How will decisions be made? How often will you meet? What information will you present at those meetings? What authority will you (and won’t you) have making decisions about hiring, setting salaries, firing, borrowing money, spending money, reinvesting profits, strategic direction, etc.? What targets are you expected to meet, and what will happen if you miss those targets? What’ll happen if additional capital is needed later? Are your investors willing and able to invest additional funds at the next stage of growth? How much ownership will they acquire for their investment now and at later dates if additional financing is needed? How are they going to feel if new investors dilute their ownership?

If at the first meeting the chemistry is wrong and by the second or third meeting you’re convinced they’re jerks, don’t—repeat—don’t take their money! Arranged marriages may work in some cultures, but the entrepreneurial part of the world isn’t one of them. Even if you haven’t had the money to pay bills for months, even if they’re promising the equivalent of back pay and start-up expenses in exchange for reasonable equity, don’t do it. Your business will never succeed if you’re miserable because of the relationship with your investors. As numbers-oriented as a business may be, there is still a very human side to it that your heart is better at evaluating than your brain.

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