Posted by Pamela Swift in Finance & Capital
Article Contributed by Jayne Blake
Entrepreneurs needing the help of investors commonly feel compelled to take whatever money comes along, no matter who is offering it.
While funding is understandably critical to the successful operation of a startup, there are times when accepting money is the wrong decision for a company. If you think of investors as relationships, then the reality of entering into a bad relationship that you won’t be able to walk away from for possibly several years should be sobering.
Here are a few tips that will help you make the right decision when it comes to choosing the right investor for your business.
The questions you should ask of any would-be investor
You want to evaluate each investor as though you were looking to enter into a long-term relationship. In other words, it’s important to know if they are going to be the right fit for your company. For that reason, don’t be shy about asking the questions that will get you the information you need.
- What companies have you invested in in the past? And, where are you currently investing?
- Would you mind if I reached out to those CEOs?
- Other than money, what type of support do you provide the businesses you back?
- What type of experience do you have with a company like mine?
- What is it about my business that interests you?
- Have you invested in similar companies in the past? How did it go?
Look beyond the money to see what else the investor has to offer
The best types of investors will take an interest in your business and be concerned about finding areas where they can help out. Investors should be introducing you to as many other investors, partners, and potential customers as they can.
In short, you want them to act as though they have your company’s best interests at heart. If they aren’t interested in finding out what areas or issues you might be struggling with and offering to see how they can help, that should be a concern.
What information about yourself should you share with investors?
In order for an investor to be excited about investing in your business, you need to give them something to get excited about. That means you need to share your story: how you got your BIG IDEA, how your team met, what makes your team ‘special’, how well you work together, and why you are the right team to make your big idea work.
It is important to make your business story as personal and passionate as you can. At the end of the day, investors are investing in your team and your vision as much as anything. Don’t make it all about dry numbers and figures if you hope to inspire.
What portion of your business should you expect to have to give up to an investor?
This can be a tricky area. The answer varies according to the level of investment you are seeking, and how much progress you’ve already achieved toward your goals.
David Cohen, co-founder of the startup accelerator TechStars mentions that entrepreneurs should expect to give up anywhere between 5% and 40%, with 20% to 30% being the reasonable rule of thumb for every round of investment given.
Cohen warns, however, that businesses should be wary of any investor who comes along and expects to take half or more of your company. In the end, you need to be assured that you are receiving more value from the investor than you are surrendering.
Jayne Blake works as a Communications Manager at Prospa, Australia’s largest online