Choose an Investor Like You Would a Spouse
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One of the biggest mistakes entrepreneurs make is thinking that procuring financing for their startup is a win if they get the money.
But securing the money can be disastrous if it’s not from the right people. Pick an investor like you'd pick a spouse.
Investors aren't just about gaining access to money: They're partners and, to some extent, they're also bosses. And just like the wrong spouse can wreck your life, the wrong investors can wreck your business.
It can happen: You take the money, and in time problems arise.
What happens if you want to pivot with a zag and your investors want a zig instead.
Or what if investors want you to fire someone you wish to keep or prod you to hire somebody you're not keen about? And so the world of startups is littered with stories of founders kicked out by their investors.
Yes, the right investors can pitch in, contribute and give you ideas and advice. But the wrong ones can pressure, object, obstruct and make your business life miserable. Even if they don't have a majority vote on the company's board of directors, investors are still part owners and have legal rights.
Discern what an incompatible investor looks like.
"But how will I know an incompatible investor when I see one?" you might ask.
Investors aren't good or bad. Compatibility comes from the match between your way and theirs and between what you want and they want. Perhaps you really want investors who leave you alone to run your business without interference. They are rare but they do exist.
I believe smart founders want investors who pitch in, help with strategy and tactics and introduce them to contacts. And probably most investors want to do that. But even when they do, if they have problem-solving styles and ways of helping that are different from yours, incompatibility can be a problem. Compatibility involves matching of people like in a marriage.
At the height of the dotcom boom, although I had grown my company, Palo Alto Software, to more than $5 million in annual sales without outside investors, I partnered with a Silicon Valley venture capital firm to build it faster.
Then the dotcom-bubble popped. Two years later, these investors were locked into holding a minority share and needed an exit. The venture capital business model required that the company be sold but I wanted to keep it and grow it.
I liked these investors. They were smart and honest and believed in the company and offered good ideas and suggestions. So I negotiated a buyback of their shares. That was hard, since I had spent the money to grow the company and it wasn't liquid. But it was better than enduring a long-term relationship based on incompatible goals.
This scenario involved possibly the best kind of incompatibility. But that’s still a good illustration of why incompatible expectations of a business can lead to difficult problems.
As is the case with spouses in a marriage, the good intentions and good people involved in a venture-capital arrangement aren't always enough. Incompatible goals can be really tough for both sides.
Avoid a bad match.
To circumvent these problems, start with the investment equivalent of a dating profile. Investors have a history, existing relationships, websites and profiles on investment sites such as Gust, AngelList and TheFunded.com. Find out what your potential investors say they want, how they claim they work and what others assert about them.
Always talk to owners of other companies that a potential investor has already invested in. Call them and talk. Beware of any investors who won't help you reach other companies they have worked with. The chance that your startup is really their first investment is very low.
And talk to your investors realistically. Be absolutely clear and transparent about who you are and what you want. Ask them straight out about their goals, history and way of working with startups.
Develop some questions that will help root out styles and approaches. Inquire what they would do about one kind or problem or another. Remind yourself why you're doing business this way in the first place, what you're about and where you're going.
Getting from an incompatible place to somewhere else after the contracts are signed can be done but not without some cost and definitely not without risk. Even in my company's case, which worked out well, I found it a scramble to deal with the problem when it arose. You don't want to scramble. Take your time up front to be sure you really do agree with a prospective investor on all the important issues. This will safeguard your business and sanity.
Bootstrap your startup if you have to, rather than take funding from the wrong investors. You're much better off with no investors at all than ones who don't fit. Scale down your plans or temporarily push them forward. Do what you can to avoid being locked into a bad investment relationship.