Practically every startup founder has or is on the hunt for the right investor to seed their vision. While the wrong ones won’t necessarily ruin a company’s chances, the right ones can make your life as a founder infinitely easier through those all-too-critical initial sales. Below we look at five areas of alignment between a founder and investors and then explore five common returns entrepreneurs want from their investors.
A lot has been written about what to look for in an investment, a founder and a company, but a major part stays in the relative shadows; what founders should look for in their investors.
As an entrepreneur, I’ve found that while they are scrutinizing you, you need to be equally as diligent in learning about them. One of the magic beans to growth is having a group of seasoned, understanding, early-stage investors on your side who can turbo charge your company’s growth. Startup business is all about people in the early stages, expertly building the correct mix of development talent and product management and sales and executive strategy. Topping this team off are investors who believe in the vision, the founder and the opportunity. When all the pieces fall into place the chances of success skyrocket.
On the inverse side, if the investor is not right for you – maybe they see a quick exit but don’t believe in the vision – then the results can be disastrous.
Before signing with an individual, an angel group or larger investment organization, consider what you want to ensure your investors are aligned with you and your company.
1. Vision & Values
Many investors take an aggressively active role in startups. There’s a fine line between offering wisdom, insight, and productive thoughts and flat out taking over the direction of the company. Taking the wheel and driving the vision isn’t what you’re looking for. You need investors who understand that you’re going to make mistakes. The goal is to avoid as many as possible, but they are guaranteed to happen.
Sharing common values not only affords quick bonds of professional friendship but can help cement the right type of corporate culture early on. Having strong alignment on values will radiate from the top giving your employees a clear understanding of what the company stands for while providing the leadership to follow through on them.
2. Trust
Startups are an emotional and financial roller coaster. You’re up, you’re down, you’re upside down, wait, how did we stop sideways? Through it all, you need to remain positive, optimistic and focused Easier said than done. You’re a founder, but you’re still a person who experiences negativity, pessimism, and depression, which the startup ecosystem is finally starting to address.
Many entrepreneurs keep these feelings suppressed (I know I did, a lot). A great investor is someone you can confide in during these tough times of the journey. Trust, transparency, and understanding are some of the most powerful qualities an investor can bring to your company.
Do you trust your investors with your rawest emotions? Will they trust you to be honest about everything happening in your startup? The sooner trust, true trust, and transparency can be established, the sooner your investors can jump in to help when problems arise.
3. Goals
Not everyone company is looking to become the next unicorn with a flashy exit and their face on the cover of Fast Company. In fact, most entrepreneurs start their businesses because they want to change the world, and they have a unique product/solution that they believe can do just that. Entrepreneurs have a burning fire inside that drives them to take smart (and sometimes foolish) risks, but those risks are all in service of the common goal of success. The right investor will be aligned with your goals and plan.
They will not act as a force to push you in another direction, or question your ultimate goals – they will challenge your assumptions and question milestone goals, which is their job as a proverbial ’third eye’ on the company – but will help you establish attainable goals that service the ultimate vision.
4. Their Desired Role
While you might have already formed a complete picture of who your investors are, and what role they will play in your startup, it’s important to understand where they are coming from. They will undoubtedly have their own concept of what role they are to play and sometimes those visions are not in alignment. Ask yourself, does your investor need to be:
Active: Someone who is intimately involved in the business, on a near day-to-day basis. Someone who has the company’s best interests at heart and believes in it so much they’re essentially a co-founder?
Passive: Someone who can help finance the business, but has no desire to be involved in the operations and would prefer to receive quarterly (or monthly) reporting on the health and growth of the business?
Advisor: Someone who can be involved on a weekly basis? Someone who can work with the executive team to help guide them through the weeds?
CEO Mentor: This is someone who could actually encompass an active investor and an advisor. Someone who has an active interest in the operations of the business, but takes a specific interest in growing the CEO’s potential so they can slowly extract themselves from the operations as the CEO realizes their own skills to effectively lead the business to scale.
This type of planning comes out through conversations and building the relationship while bringing the prospective investor into the fold. Just remember to go into these conversations with an open mind and flexibility so you can both aim to meet in the middle, or better yet, on the founder’s side.
5. Positivity
Everyone is happy at the start, but how we act under pressure reveals our true selves. This could not be truer when dealing with someone who has put their own, hard-earned money into your venture and trusted you to produce results. Aligning yourself with someone who has a positive outlook, and knows that there will be ups and downs can help be a steady hand when things get rocky, but also a much-needed boost of enthusiasm for beleaguered founders in times of need.
Now you have an idea of how you should be aligned, it is time to ask, what do you want from them?
6. Strategic Expertise
Strategic expertise is real-world experience. An amazing MBA GPA doesn’t count – theory and case studies are great, but clean hands don’t build buildings. You want someone that has gotten their hands dirty. They’ve lived on instant ramen and spent years of their life building something great. They know what it means to be an entrepreneur in practice, not just in theory.
The best investors leave decisions in your hands and respect your authority as CEO, but they’re also not afraid to speak their minds and voice thoughts and concerns that they’ve amassed through experience. If they’ve invested in a company like yours before – or even run one – then they’ll have first-hand knowledge of the various pitfalls and opportunities that lie ahead of you.
To become an entrepreneur is to embrace failure every day. An experienced investor has made errors of their own and typically, they’ll be able to tell you how to avoid them. If you’re going to make mistakes, they might as well be new ones! An investor who has ‘been there, done that’, is the one you want behind you, championing your company.
7. Contacts
The importance of this one is self-explanatory. A robust network of connections within your company’s industry can help quickly forge important early partnerships and customers to help make your first sales. As a founder, you should reach out to investors who have specific industry connections in your specific industry segment.
An investor who has 10 years of experience in your industry is far more valuable than an investor who has 30 years of experience in a completely unrelated industry. Do your due diligence on any investor you’re speaking with and figure out who they know and how long they’ve known them – these could be your key connections moving forward. Platforms like LinkedIn, AngelList, and good old-fashioned telephone calls are your best bet here. Don’t be afraid to ask about the connections you consider valuable. While LinkedIn might say they’re connected, they might have met once at a conference but cannot offer any more of an open door than a direct message via Twitter could offer.
8. Successful Track Record/Serial Entrepreneur
Ideally, you will find an investor who has either been an entrepreneur themselves or has invested in early-stage companies that have gone on to be successful. If they’ve built a company that has successfully exited, or if they’ve invested in a company that has, they will know what it takes to punch above their weight and scale a company to success.
Having an individual with a reputable name as an investor or serial entrepreneur can afford your company a sense of competence and prominence in the marketplace that could have taken years to build up if you follow the bootstrapping path to growth.
If your investor can point to past successes in your industry or other relevant industries, that should give you confidence that they’re good to work with. Even better if they can point to specific examples of how their influence helped businesses like yours grow and achieve their potential.
9. Mentorship
Particularly in the early stages of your relationship with your investors, you will need to be comfortable working with them on a fairly regular basis, taking the opportunity to become a sponge for knowledge and knowing how to manage their expectations and their opinions about how things should be done. While the ultimate decisions fall to you as the founder, there will be certain situations where your investor’s experience will be far greater than your own and you’ll need to let them call the shots (behind the scenes). Taking this opportunity to learn and be mentored by someone who has been there and done that can tremendously aid your development as an entrepreneur – after all, you don’t know what you don’t know.
However, giving up the reigns can sometimes be difficult for founders, particularly first time entrepreneurs who are used to making all decisions. The test for this is to ask yourself when speaking to potential investors if you would be happy working for them if they were the ones running the business. If you wouldn’t be comfortable with that, then they may not be the investor for you.
10. Straight Talk
Entrepreneurs are emotionality invested in their business, how could you not be! This is your baby, you conceived the idea, poured many sleepless nights into forming it, took the risk to strike out on your own and have grown it to today.
For many founders, their company becomes a part of their personal identity. This makes it very difficult for entrepreneurs to step outside of themselves and think about things from an objective perspective. Great investors help the entrepreneur see situations from a different point of view. They’re able to present the third eye approach to problems and give you the straight goods on where the pratfalls may lay, and more importantly, advise on the best course of action to find the right solution.
They know you’re personally invested, but they’re financially invested so it is in their best interests to give it to you straight and quickly so that solutions, pivots or dodges can occur and you can get on with building the next unicorn.
While these are some of the areas of alignment and wishes to have in an investor, by no means is this a complete list. Each company has its own unique needs and requirements. Each investor has their own checklist for due diligence on a founder and I’ve written about how to Avoid Picking The Wrong Investor to give founders a checklist of their own when talking with possible suitors. It is where they meet in the middle that the great partnerships are formed and the founder and investor work together to build to scale.