For entrepreneurs looking to grow their business, fundraising is a common path to take.
But to ensure the business is pushed in the right direction, it’s important that investors aligned with the company’s vision are brought on board.
Alejandro Cremades, author of “The Art of Startup Fundraising” explores the ins and outs of fundraising for entrprenuers, including tips on what to look for in an investor.
According to Cremades there are three keys to landing a good investor: Know who you do (and don’t) want as an investor, know how to screen an investor, and know how to converse with investors effectively and efficiently.
“When you onboard an investor, that institution or individual becomes part of your cap table, and they are in for the long run,” he says.
“It is well known that divorcing your wife or husband is much easier than divorcing your investor. You need to be very careful with whom you are getting into bed.
“Seeking the right investors is critical to get right, even for the smallest amounts of initial seed funding from friends and family. Just ask Mark Zuckerberg. And those initial investors are going to have a huge impact on who you will be able to attract for additional rounds of funding, and what those terms will be. So even if you are borrowing only $1,000 from a relative or classmate, make sure there is no lack of clarity on the agreement and that you aren’t setting yourself up for heartbreak later on.
“Deciding what’s important in an investor or capital source at the outset helps founders streamline the process of filtering and screening, while empowering them to make good decisions. This really has little to do with the money part of the equation.”
From Chapter 11 of his book, here’s:
What startups should look for in an investor
1. Domain Experts
More money can be great, but there are a variety of places to get it. Don’t just settle for money. Look at what else an investor can add. If you’ve ever watched an episode of The Profit with serial investor Marcus Lemonis, you’ve witnessed how an expert with a fresh perspective can add a ton of value. This doesn’t mean investors are going to come in and take over your business. But perhaps they can lend their experience to help you make traction. Sometimes all it takes is a few tweaks you hadn’t thought of. What’s offered could be business-related in general, industry-specific expertise, or simply funding and the financial aspects of your venture. Ask what expertise this capital source brings to the table that makes him or her more valuable to you than the next one in line.
Look for well-connected investors. Great connections are some of the best value that you can ask for as a startup. If you can get money and connections together, that’s a two-for-one not to be passed up. Trust and power with the best connections can take years and an incredible investment to develop. Investors are guarded well, and for good reason. Yet, sometimes all it takes is the right connection for a startup to go really huge, really fast. Take any of the investors on the panel of the reality TV show Shark Tank, put a product or service into their hands that they can promote through their channels, and it can be an overnight hit. It’s the same concept as celebrity sponsorships. If the right celebrity is out there touting, advertising, and recommending your product to the right demographic, business can explode. Of course, most fledgling startups can’t afford celebrity sponsorships like Nike or adidas, at least not in a sustainable way. Raising capital from a connected investor flips this equation. You effectively get paid to get promoted. This isn’t just about celebrity product placement or celebrity tweaks—it can mean incredibly powerful retail distribution channels, too.
3. Financial Strength
When was the last time the prospective investor funded something? How much does the investor have left? How are the investor’s other investments performing? How strong is the investor financially? You don’t want your startup to be the only hope for the investor. If the investor isn’t doing well financially, that person is going to be under a lot of stress, and that pressure will flow down to you. Even if it isn’t that serious, it is clearly more efficient and profitable to have an investor partner who is able to provide further rounds of funding on his or her own. It is even better if they are connected to others with capital. Birds of a feather flock together. At the other end of the spectrum, when you see a venture capital firm that has not made new investments or followed up on investments in a period of six months, you know they are running out of capital on their fund and they are having troubles in securing the next fund. Investors need to schedule regular meetings with entrepreneurs, regardless of being in investment mode or not. For this reason save yourself time and move on to another firm that has the ammunition to pull the trigger.
What to avoid in an investor
There is a distinct difference between conducting a profitable business and being greedy. You can be a very successful and wealthy investor without having to be greedy. If all your investors want to do is take, take, take, and milk every dime from your startup, then your successes are not going to be sustainable or even enjoyable. An investor may very well be able to rush you to an IPO, but that doesn’t mean it will end well. Selling out your startup’s soul isn’t going to feel good if it is something you really care about. Even if all you care about is the money, someone who wants only to take will find every opportunity to do so. And don’t forget that if you plan to move on to additional business ventures, this one is going to be at the top of your resume. It’s your calling card. Even if it wasn’t your vote, your startup will tell others a lot about you. What will it tell them? You will start to see some red flags concerning this type of behavior when you are in the negotiation process of your deal. Keep your eyes open for the addition of certain clauses that are out of market. This will tell you what type of individual you are dealing with. If this person is showing these signs at the “dating” stage, imagine how things could turn out if the company is not doing well.
2. Lack of Scruples
Greed is one thing, but unscrupulous, shady individuals take things to a whole new level. If you risk colluding with people who have no values, there is really no telling how ugly it can become. And when you get even a little bit dirty it can lead to a rapid downward spiral. You can be damaged simply by association. If there is any bad business in motion, the investor is normally going to be better insulated than the entrepreneur, leaving the founders who have their hands on the controls as easy scapegoats. This can clearly get really scary when it comes to health-care and financial startups. No industry is off the hook. And partnerships go both ways. Savvy investors with values should be looking for good qualities in founders, too, though it isn’t always easy to discern who’s ethical. Take Mark Cuban’s investment in Motionloft as an example. The original founder ended up being hunted by the FBI for allegedly spinning tales of a secret deal to cash in on the company while taking money from individuals. That founder naturally lost his job, and the press coverage added additional pain. If your instincts tell you something isn’t right, steer clear. A bad decision can follow you forever.
3. The Takeover
If you know Steve Jobs’s story, you can probably empathize with the heartache and frustration of being booted from your own startup. Few entrepreneurs get as far as being funded unless they are really passionate about their startups. Even if you don’t have the burning passion for perfection that led to the iPod, who wants all of the blood, sweat, and tears to end with getting kicked out of your own venture right before it blossoms? Getting bought out and staying on as an executive, or giving up a piece of the pie in exchange for being able to make your vision become a reality, doesn’t have to be all bad. If Facebook or Google buys in, gives you an amazing suite on their campus, and puts their teams of developers at your beck and call, it could be a dream come true. But no one wants someone else to turn his or her venture into something different and end up being relegated to the position of a powerless pawn—or worse, shut out altogether. So watch out for term requests that appear to suggest that this may be the intention.
This excerpt is from “The Art of Startup Fundraising”, written by Alejandro Cremades.
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