Founders need to look beyond the financial support they receive from investors and evaluate whether they will fit their business.
After all, you will be giving the investor a valuable piece of your business and will potentially be on a long journey together.
Here are a few tips on how to evaluate smart and helpful investors.
Active venture support and value add
Many early-stage investors, incubators and venture capitalists will say they offer active venture support to their portfolio companies. They claim they take a hands-on approach, but what does this mean in reality and does this align with what your business needs?
It’s important to understand upfront the extent to which your potential investor will want to be involved in your business and if what they are offering aligns with the support your business actually needs.
Expectations around information requests and regular updates should also be understood upfront.
I recently met the Science Inc. team in Los Angeles. They’re an incubator that backs entrepreneurs who build companies and disrupt markets. They have a reputation for providing very active support to their portfolio companies from market testing to product build to capital raising.
One of their recent exits, Dollar Shave Club, was acquired for a reported $US1 billion by Unilever. The right kind of venture support from investors can make a significant difference.
Subject matter expertise and knowledge
Founders should consider whether their potential investors are able to fill in knowledge gaps or are strategic to their venture. Have they worked with or built a company in the same sector? Do they understand your business and industry?
Each industry has its own nuances and if you haven’t spent time working in the industry you may easily miss these. By having an investor who is a seasoned industry veteran who can understand trends and metrics, your investor becomes a resource that can monitor your business’ progress by helping you understand what metrics are important for your business.
Knowledgeable investors can also help with detailed aspects of business strategy such as customer acquisition or marketing strategies.
Global connections and local networks
Founders should also look at their investor’s reach. The outreach of your investors and the potential opportunities that can arise from them can create enormous value.
Consider how the investor might help you grow your business by adding to your topline through a customer introduction, boosting your team with new talent or advisors, foreign partners who can help you enter a new market, other strategic investors for future capital raises, or even an introduction to an organisation that could acquire your business.
Another company I recently met in Los Angeles, ZestFinance, is a fintech company using machine learning to transform vast amounts of data into credit scores.
They took investment from Chinese tech giant Baidu, a company that operates the leading internet search platform in China. Expanding into China and navigating a new market as a foreign company without a strong network and partnership could be incredibly challenging, especially with the barriers to accessing consumer data.
An alignment with Baidu will enable ZestFinance to access Baidu’s search data to help build their business in China, giving them an edge that their competitors would not have.
Trust and patience
A founder needs to be able to draw a fine and hard line between friendly advice and investors taking control over the direction and vision. Founders should find an investor they trust to give them the freedom to make mistakes, reflect and learn.
A good way to evaluate this balance without having worked together before, is to talk to other companies in which they have invested to understand their experience, expectations and the support they received.
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