10 criteria entrepreneurs should use when vetting investors – The Business Journals
For the past decade I have run one of the largest conferences, Angel Venture Fair, that introduces entrepreneurs to investors in the U.S. I am also an avid watcher of “Shark Tank,” a must watch show for any entrepreneur raising money. Often new entrepreneurs are fixated on the cash, which is understandable, because they are usually fighting for survival.
Getting the wrong investor, even if they can provide all of the capital needed, can turn out to be worse than running out of money and wondering how you will keep the ship afloat. The wrong investor can both crash the business and crush the soul of the founder. Here is what every entrepreneur should consider before taking anyone’s money.
Industry expertise – Having an investor that understands your industry will make it easier to obtain capital and they can challenge your various strategies such as product/service development, marketing and sales.
Industry contacts – Often entrepreneurs don’t know many high-level contacts in the industry they are pursuing so having an investor that can setup meetings with potential customers and strategic partners will be worth more than the capital invested.
Investor contacts – Most times one investor won’t put in all of the money so having an investor that can bring in other knowledgeable friends and colleague will increase the chances of success exponentially.
Patience – Investors that don’t know the business won’t understand how long the sales process will take and will be calling the founder every day if sales don’t match the business plan’s timeline that they invested in. Rarely, do entrepreneurs meet their sales goal because they underestimate the difficulty of selling something new or marketing a new company in an existing field.
Follow-up capital – It is critical that investors who put in the initial capital have the ability to continue investor or prospective investors will question the future the business if the exiting investors don’t continue to support the company.
Ability to recruit talent – Investors that know the industry have business contacts that they can assist in recruiting key employees, especially in sales and marketing. There is also a trust factor that potential employees will be swayed by someone they know.
Strategic – Good strategic thinkers are harder to come by than you think. Strategic thinkers see the big picture and play the long game. They are more likely to put more money in when it is needed.
Good listener – Sole funders can’t confide in their teams about their concerns and fears. Having an investor that is a good listener and could provide thoughtful constructive feedback is as valuable as the actual investment.
Experienced failure – Having an investor who themselves experienced failure is huge. They are humbler, understanding, better problem solvers and more invested in the success of the entrepreneur. They will have the entrepreneurs back.
I have seen entrepreneurs take the money from investors that only bring cash and wish they had a time machine so they never would have accepted the money. Who you take money from is probably the second most important decision you make outside of the team you put together. Lastly, rely on your gut instinct because that is a reliable barometer of whether this new partner is right for you.
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