The most important decision an entrepreneur can make is arguably selecting a venture capital firm or other investor for their company.
• Be aware that your primary consideration is a partner rather than money. Money does not differentiate between people. You need to approach the situation with this mindset and the idea that you will spend a lot of time with this person. Do you both feel a sense of connection and respect? On the other hand, always test yourself with the airport test: If you and this person were stranded at an airport during a snowstorm, would you pull your hair out, remain neutral, or be thankful for the unexpected quality time?
• Determine an investor’s capacity to fill the specific value gaps that need to be filled. What gaps, besides the money, are holding you back from success? Are there any essential team members at the investment company who could assist in filling them? Relationships with customers or partnerships? Does the investor know anything about your industry and business model? It may seem obvious, but you should look for an investor who has a track record of success and, ideally, experience working in a field that directly relates to your business model and industry. Always ask yourself, “How connected and smart is this investor for what it is that I am trying to build and grow?” when starting a business. Entrepreneurs should fundamentally consider whether they are receiving significantly more than a new outside investor to help price a round, regardless of what it is that you might require for your business.
How much time and effort will the investor actually put into helping you? Like most things, it has to do with the person who will be on your Board or standing up for your cause, not the company that is investing (though there are some firm considerations that are discussed in the next point). Ask the person how many other Boards they are serving on, what their expectations are for communication protocols, and how frequently you can anticipate interacting with them. Important as well: Do you have the option to turn the volume up when necessary, or do they expect you to control the dial? You should always have the option of their attention and time; When determining how much time is required, the entrepreneur should always be the customer. Ensure that you check this availability during the diligence process.
• What is their investment’s time horizon? We have established a permanent capital structure to reflect our belief that a long-term focus is always preferable to a quick exit. The majority of venture capitalists and private equity firms have limited fund life. “In what year of the ‘J-Curve’ is the fund from which we are receiving investment dollars?” is one question that entrepreneurs do not ask frequently enough, and it is one that we ask whenever we are considering partnering in any syndicate round. For instance, if a fund has a lifespan of ten years, investing at the beginning of the investment J-curve is very different from investing at the end. You want to be in sync with your partner, be honest with them, and know how long someone expects to be there before an event.
• Careful investigation and less conventional reference checking We always say that a bad reference to an entrepreneur is a big red flag. Because entrepreneurs will only provide the names of contacts who will say good things, most reference checks only have a modest value. On the other hand, the best investors and VC firms will talk about investment situations that didn’t go as planned, as well as those that went well. Request that your investor disclose the names of those CEOs and founders. Like in a marriage, when things are going well, everyone is happy. However, when things go wrong or fail, you tend to learn a lot more about your partner’s true colors. Perform a more in-depth and less conventional reference check, beginning with the investor-provided businesses whose situations were not favorable, working your way up to entrepreneurs whose names you were not given, and ending with the VC firm’s contacts who are known to be in good situations.
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