Having investors on your team is like marriage – it can be a great thing if done with the right person.
But with the wrong person? It can destroy a business.
More important than finding people who are willing to invest in your company is finding the right ones. Investors are not just walking ATMs, and they should be evaluated and utilized for the breadth of experience and skills they bring to the table.
Today, we’re going to explore the top 5 things you should be looking for in investors, and conversely, the top 5 things to avoid.
What to Look For in an Investor
This seems like a no-brainer, but oftentimes, if a buyer is looking for someone who can simply bring capital to the table, she or he may neglect to evaluate an investor for his or her experience.
Does this investor have experience building, helping, and running businesses? Better yet, does the investor have experience within the industry, as well? Having industry-specific experience is a huge boon to you in understanding the industry landscape, discerning industry threats, and framing realistic goals.
Lastly, does this investor have a track record in investing in other businesses, and how did those businesses perform?
2. Core Value Fit
It bears repeating that an investor’s role is not simply to provide capital. Investors will interact with your business and engage with your team, and, for this reason, it’s important that your investors are also a core value fit.
What does that mean? It means that the investor is genuinely invested in your team as much as their ROI. No company achieves success without an aligned team, and having someone as a director in your business who does not share the same values your team does can create friction that will work against your efforts to be successful as a new business owner.
Take some time before purchasing a business to evaluate what core values are important to you as a leader. When prospecting businesses, analyze what core values the company and employees already operate under. Lastly, compare these against the values you see your potential investors embodying.
3. Rational Risk-Taking
There are two groups of investors. The first makes emotional decisions and attempts to buy low and sell high. The second group makes investment decisions based on facts (pitch deck, financial history, projections, business plan, etc.), looking to find good deals that will turn into better deals upon selling their shares.
You want to evaluate the investors you’re working with for their ability to do two things: make decisions based on fact AND support you in taking the risks necessary to grow the business. Investors will always be inclined to protect their investment, but smart ones will understand that they won’t be able to grow their investment without calculated risk.
Ensure you and your investors share the same risk tolerance.
4. Mentorship & Support
Investors, bringing capital and extensive business experience, should also provide you with moral support and guidance along the way. She or he is just as invested in the success of your business as you are, and a huge advantage you have by having an investor on your team is the expertise she or he brings to the table.
Similarly, there are key elements any mentor should have. The first is reasonable expectations and the second is a calm and patient demeanor. An investor understands it takes time to grow a business and that sometimes the reality of hitting a target doesn’t always go according to plan. A good investor will be encouraging, supportive, and help you pivot in these moments so you can stay on track and keep your head in the game.
5. Influence & Network
If an investor has been around for a while (and hopefully he or she has and is bringing that experience to your company), she or he will have a network developed from years in business and potentially a particular industry. Having a network is helpful because success is partly hard work and partly who you know. Having an investor that is connected with the right people can help provide you with the connections you need to scale rapidly.
Additionally, this is a good litmus test. If an investor has been helping businesses for a while and she or he doesn’t have an extensive network to show for it, this is a ding to his/her credibility. Why would an investor have years of experience but no connections? There would be a valid reason why.
Lastly, in having an established network, an investor will have influence and can make things happen on a larger scale than you can. Tapping into an investor’s influence is another feather in your cap that will allow you to scale.
What to Avoid in an Investor
1. Differing Visions
Your business won’t be able to have an upward trajectory without alignment, and that starts with the vision.
If you want to source higher-quality products to increase customer satisfaction, but the investor wants to cut costs and increase profit margins, this would be an example of differing visions.
Just because an investor brings capital and allows the purchase to be even possible, that doesn’t mean you have to sacrifice the vision you have for the company. At the end of the day, YOU are the CEO. You are the person running the business day-in, day-out. If you do not believe in your vision and are trying to bring a vision to fruition that is not your own, you either won’t be successful or will resent yourself doing it.
If you and your investor have differing visions, but you believe you can make it work, your separate roles and responsibilities must be outlined on paper. You have to respect what he or she does for the business and vice versa. If there aren’t clear, written guidelines that dictate what both of you have a say over (and what you don’t), there will be management creep over time, and this tension will create problems for your business.
2. Emotional Decision-Making
Success doesn’t have shortcuts, and that applies to running a business.
Investors have every right to have an expectation of when they will see a return on their original investment. However, if you’re dealing with an investor who is pushy or attempts to make decisions on behalf of the business that are driven by pure speculation and emotion, this behavior can create a stressful environment for you as the CEO of the business and can be counterproductive to whatever goals you are trying to achieve.
Look for an investor who is level-headed and approaches his or her investments with the long game in mind – not for the quick wins.
3. No Business Experience (Only Managerial Experience)
These types of investors may come with decades of high-level managerial experience in the corporate world, but they have never run a business themselves. The easiest way to determine this is by simply asking them or reading their biography online.
The problem with this type of investor is that high-level management experience doesn’t correlate to running a business, and the types of skills it takes to manage teams in the corporate world are very different from those required to run businesses. These investors may have learned to manage employees by being disconnected from the work their team performs while micro-managing it at the same time. This is not a leadership style that works well in a small business setting.
Not only do they not have relevant experience in running businesses, but they may be overly pushy for you to hit business targets without understanding whether or not their demands are sensible based on what’s going on with your company at that time.
Similarly, avoid investors who want to take over all of the company’s strategic decisions. Mentorship and engagement are great, but micro-management is not.
4. Habitual Litigators
If an investor is constantly involved in a lawsuit, this is an investor you want to avoid. There are a few reasons for this.
One, they may create agreements that are onerous, with obscure clauses that put you in a vulnerable and less favorable position.
Two, they may leverage the possibility of a lawsuit by coercing you into doing things, especially if they know you don’t have the financial means to fight them in court.
Lastly, you have to ask yourself what type of person would find themselves in frequent lawsuits, let alone want to be a part of them. If an investor is more concerned about being litigious than they are focused on helping you grow your business, this won’t be a value-add for you in the long run.
5. No Money
It goes without saying, but you should avoid self-proclaimed investors who don’t actually have any money to invest in your business.
However, this isn’t always evident up front, especially since you can’t exactly peek at their financials to vet their means of funding. That being said, you’ll be able to spot this in the way they frame the structure of their investment. Sometimes, investors will want to play an active role in your business instead of putting money down, or they may charge you a fee.
Get clear on what financial commitment you’re expecting from an investor and ask them directly if this is something they are willing and able to support. Ask about their previous experience to connect the dots on where exactly they gained the money that they would be able to invest in your business.
There you have it. You should now have a better understanding of the things you need to keep an eye out for when prospecting for investors to help you buy your next business.
Stay tuned next week, when we discuss what you need to know and do before taking on investors.
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