Under capitalization is the number one reason that businesses fail. Your budding business needs plenty of dry powder — capital to fuel growth and help weather the storms that will inevitably arise. While investors are the source of that dry powder, it should be more than just money that bonds you. Investor and Founder relationships are a partnership, so it’s important to identify who the right investors are for your company, what the “right fit” is, and where you can find it.
(In case you were wondering, the number two reason businesses fail is dysfunctional leadership who do not work well together. That also relates to fit. Stay tuned for a blog post on that.)
Here are some important things to keep in mind when finding the right investors for your business:
- Understand Your Options
Different types of investors can help you with different business goals, so it’s important to know what your priorities are before identifying potential investors. Do you need a bigger network, more industry expertise, more more money, or a combination of the three? There are three primary capital sources: angels, venture capitalists, and private equity.
- Angel Investors are high net worth individuals that typically invest in businesses just bringing their concept to reality. They seek high returns through private investments of startup companies, and provide smaller sums of money than venture capitalists. Angel investors are typically former entrepreneurs or executives who cashed out early from their own successful ventures and bring their expertise with them.
- Venture Capital investments are designed to fund companies with the potential for high growth. These investors seek to add value as well as capital to the companies they invest in to help grow and to achieve a greater return on the investment. Almost all venture capitalists engage in active involvement, and can provide expertise in business planning and strategy.
- Private equity are capital investments usually made by private individuals or privately-owned institutions in exchange for a share of ownership in the company. Ownership is represented by owning shares of stock or having the right to convert other financial instruments into stock of that private company.
- Know What the Investors Can Bring to the Table
Since the most experienced investors are generally industry veterans, they have expertise and insight that can help you raise additional capital, manage your infrastructure and strategy, and more. At minimum, many investors (especially VC’s) will want a seat on your board as they actively help your business grow. You will want to partner with those who provide guidance and support, without micromanaging every decision you make.
Before courting potential investors, you should do your research: what is the reputation of these investors? What is their area of focus, and the stage of development they typically invest in? Since this partnership is a two-way street, you should ask questions to investigate what a partnership would look like. Ask about their most recent investments, their expectations of founders, how involved they like to be, and what they typically provide to the companies they invest in. Having this background knowledge will help you determine whether this partnership is the right one.
- Ensure Your Investor is the Right Fit
Since these investors will have a key stake in the future growth for your business, it’s important that they share a similar vision for what that future looks like. Do they buy into your mission? Start with a winning pitch deck: this singular document will be the biggest written impression you give a potential investor and the “hook” to capture them, and hopefully establishment some alignment of their interest with yours. It’s your opportunity to express the vision you have for your company, and chances are, only those that share this vision will look into forming a partnership.
Besides a shared vision, ask yourself if the potential investors mesh with the culture of your company. If they are actively involved in advising on the strategy and operations, it’s important that they jive with the existing culture you’ve created.
Most importantly, investor partners should be accessible to you for support, since they now have their skin in the game. Besides a capital boost, what else do you need from an investor? When chosen correctly, an investor can act as both a willing backer and a trusted advisor to help your business thrive.
Written by: Judson Sutherland, Founder & CEO
