Swiping Right on a New Investor? Do This First.
When it comes to investors, all that really matters is that you share the same values.
It’s difficult to keep up with everything going on in the news today, but those of us in the technology space have been more than a little wary of U.S. Sen. Elizabeth Warren, D-Mass., and her plan to break up large tech companies and regulate tech mergers.
While Warren may have the best intentions and believe that the likes of Amazon, Google and Facebook "squash small businesses," her plan to keep tech giants from acquiring startups would, in my opinion, severely dampen innovation and seriously hurt the industry.
My argument? Acquisitions require consent. Startups that sell to tech companies have a choice in the matter. No one is forcing their hands. In fact, many startups were founded with the specific hope of one day being acquired by a major player.
You need only look to their venture-backed nature to understand this. Many of those investors jump on board armed with a solid exit plan.
Restricting acquisitions in fact could set the stage for more small business closures. Not every idea is a stand-alone venture, and acquisitions can save struggling yet innovative startups. Sure, fewer companies in 2018 secured funding, with the number of deals falling 5.7 percent. But that’s just the nature of the venture industry, according to the National Venture Capital Association.
Instead, the government should overhaul the utility patent application process. The reason is that it’s difficult for entrepreneurs to obtain a patent for most software platforms -- unless they employ a proprietary invention such as a new algorithm.
Preventing a tech giant from copying a startup’s software functionality is a much bigger issue than having too many mergers and acquisitions.
A better tactic would be to encourage risk-taking and investing in new startups through grants, government contracts, tax incentives, hackathons, etc. Stronger privacy laws also wouldn’t hurt. Doing any of the above, while enforcing existing regulations, could actually improve competition in the tech space.
Best practices for better investor relations
If Sen. Warren’s plan goes forward, it could easily drive investors away. And as you probably know, your choice in investors can either destroy your dreams or break down barriers on the road to reaching your full potential. Fewer options mean you couldn’t be as discerning as to who invests in your company.
I've gone through the exhausting/exhilarating process of founding two technology companies, so I know firsthand that the full gamut of investor experiences can range from miraculous to miserable.
In the worst cases, the cause is not dollar-related but a complete disconnect in the investor-startup relationship. There's no shared vision for the business, and values also diverge. As many know, vision and values are two of the most important ingredients to good relations.
Determining whether you and your potential investors share both a vision and values is no small feat, but the following guidelines can often help:
1. Ask about motive and future plans.
It’s always wise to get a read on why investors want to be involved in your business in the first place. So, press them for an answer that’s not financially related. The answer will give you a clearer idea of these investors' intended level of involvement.
Also ask potential investors where they see the business in five to 10 years. Those without clear answers may not be a good fit. After all, it takes vision and shared goals to anticipate a path over the next decade.
Asking about an investor's motive and plans will also give you further insight into why someone wants to be involved with your venture, beyond short-term profits.
You want to understand whether investors are aligned with your long-term interests or just using your venture to boost their portfolios. Get to the bottom of this by asking a couple of questions that’ll tell you more than you think.
Start by going over how many rounds of funding that potential investor thinks are necessary to create enough working capital. Investors with short-term interests will likely say no more than one or two rounds, including their own investment. Next, ask about their expectations for the size of the board. The smaller the number, the more control this person is likely seeking.
2. Recognize influence (and incompetence) when you see it.
Never disregard the matter of an investor’s influence in your industry. Forming partnerships with influential backers can open doors to other investors, new distribution channels and different media outlets. It can also provide additional resources in such categories as HR, marketing and overall legitimacy.
Oftentimes, corporations swoop in to invest in promising startups. Then again, entrepreneurs may actively want the corporate support. Software giant SAP created a Startup Focus program (now folded into SAP's PartnerEdge-Build) to connect innovative entrepreneurs with SAP resources and technology in order to accelerate faster and get to market more quickly. More than 5,000 independent software vendors have taken this route (for a fee, of course -- about $2,620 per year).
Individual investors can also come to a startup by way of references, and the best will be from people with values similar to their own -- with one exception. When the reference comes from a friend who’s never had any success, beware.
Even if the investor has the funding you need, other issues could be swirling. Remember, money is only one factor -- and definitely not the most important -- in finding the right investment partner.
3. Manage expectations and set realistic goals.
As with everything, tempering expectations is key to maintaining equitable relationships. Sell potential investors on the long-term benefits of coming on board; stress the level of work required to get there; and avoid committing to short-term revenue goals. Anything else is just a recipe for overpromising and underdelivering.
Besides, everything from market conditions and competition to regulations and investor pressure can affect your revenue targets. But because of your promises, the fault will rest squarely on your shoulders -- even if the fault is not yours to bear.
What you can commit to are developmental milestones, such as the release of a new version of an app, added product features, the signing of new vendors or the attainment of a target number of monthly active users. All are tangible goals. They’re also achievable, measurable and potentially time-bound.
When it comes to investors, then, all that really matters is that you share the same values. They don’t necessarily need to be altruistic values. If you both care only about making a quick buck, then consider yourself set -- at least you're on the same page! Let someone else build a philanthropic or benevolent startup. The key here is alignment, no matter what your end goal.