Choosing Your Investors: How Do You Know They’re The One?
When you’re a startup on the hunt for venture capital, there are plenty of different avenues to choose from.
But when you finally have investors interested; it can be hard not to jump the gun at every offer that comes your way. It’s important to remember that investing is not transaction-based, it’s relationship-based.
In many ways, picking an investor is like choosing a romantic partner or spouse, it’s a serious, committed relationship. It’s a relationship that can help you grow, or make you miserable if you’re not careful.
So when you’re deciding what investor(s) are “the one” here are some things to consider.
Remember that you’re looking for a partner.
When you are choosing a life partner, you want to make sure their values and beliefs align with yours.
When choosing investors, the same thing goes. It’s important to make sure they align with your vision and values as a company.
“It’s more than just somebody writing a cheque. You’re going to be accountable to this person, you’re going to be spending a lot of time with them and so you really need to make sure that the person you’re getting involved with is someone you want to be involved with. That they align on the vision you have for their company and that they will be a strong partner,” says Nicole LeBlanc, associate director of strategic investments and partnerships at BDC Capital.
Yet, this doesn’t mean you have to get along with them all the time
“You may not always agree, just like you would with your spouse,” LeBlanc says. “But at the very least you can respect each other and really understand the path forward and how you both are going to build up together.”
What’s your type?
Like there’s different kinds of relationships, there’s different kinds of investor partnerships too. As a company, you need to decide what kind of investor relationships you want to have.
“Particularly for investors who are very vertical focused, they’re experts in their own right in their particular field. They will likely be more hands on because they really understand the space and they have a network,” Leblanc says. “And if they are going to be introducing you to their network, they’re going to make sure that you perform and make them look good or don’t make them look bad. “
Meanwhile, other investors have a more broad approach and perhaps have a bigger portfolio. Often, these investors are not as hands-on, but don’t take that as a sign they don’t care.
“They’re very strategic and they can help you with more generic things like fundraising or connections, access to other markets and things like that,” LeBlanc says. “There is certainly a different types of investors and you really need to make sure it’s very clear up front which one they are and if you want that type of relationship or not.”
Be straight-up from the beginning.
In a romantic relationship, it’s important to be honest from the start about what you’re doing and what you hope to accomplish. You wouldn’t want to get in a long-term relationship with somebody who wants to have 5 kids when you want none. Telling someone what they want to hear could end up biting you in the ass down the road.
It’s a similar deal when you’re considering an investor. Though, it’s ok not to be on the same page with every single thing.
“You need to be very open and transparent with them on what your path is,” LeBlanc says. “As an investor, your job is to know plan b, plan c and plan d. So they are going to try and poke holes in your strategy and you have to have an answer for that. I think through dialogue, you can determine if you align or not, or you may agree to disagree.”
Another important thing that needs to be communicated is how much the investor expects in a return.
“Traditionally, angels will be happy with a lower return in a shorter time horizon, whereas a venture funds need home runs,” LeBlanc said.
Will they be there at your best AND your worst?
Like life itself, growing a business often doesn’t go as planed. Though you are bound to experience incredible highs, you are bound to go through some rough patches.
“Whatever you pitch, it’s never going to go as planed. If you think you’re going to hit these three milestones at these three times by doing X, Y and Z, that’s not going to happen,” LeBlanc says.
“Everybody misses millstones, everybody doesn’t hit their targets and that’s ok, as long as you know how to react and adapt.”
So with that, you need to have an investor that’s going to have your back and help you find your path when those things happen.
“Your investor needs to respect you enough to say ‘Ok, they are going to do this and I’m going to support them in that,'” LeBlanc says. “Just like a kid going through school, if you don’t hit the mark you want on the test, then you’d figure out how to study harder or how to do another assignment. Your parents need to be able to encourage you to do that and not just throw you into another school.”
With this, it’s important that your investor respects your ability to execute and adapt when needed.
“You can’t be second guessing their intentions all the time. You’re not going to share all the dirty details. A lot of people hate to come with just a problem; they want to come with a solution,” LeBlanc says. “But you do have to be forthcoming and upfront. You need to feel confident your investor is going to support you in that and help you with it.”
How do/did they treat their other partners?
If you’re interested in someone, you likely will ask people you can trust about what they are like as a person, etc…. You also probably creep them like nobody’s business on social media and the web.
LeBlanc says it’s appropriate to talk with the other companies in your potential investor’s portfolio to get more insight on their philosophy. It is also important to do as much research as possible in general, including looking up articles online, blogs etc….
“You have to do as much due diligence on your investors as they are doing on you,” she says.
TDLR? Communication is key
At the end of the day, finding out whether or not an investor is a good fit comes down to communication. LeBlanc says this is something startups often get wrong, even after they enter a partnership.
“It’s important to be upfront and clearly communicate with your investors, because they have seen a lot…and they can help you with problems,” she says.
“…because no matter how bad it is, if you just go quiet your investor will think it’s 10 times worse.”