What entrepreneurs really need are investors who will be true partners – who’ll contribute a wealth of non-asset value and can fundamentally impact a company’s trajectory.
Less than half of all startups in India make it past the first year, according to a study by Microsoft Accelerator. And only a fifth manage to survive beyond the third year. Those that come through and the chosen few that also deliver oversized returns do so because of the quality of support they get in the initial years.
Start-ups often raise funds from external sources like investors. But wait, there are several different types of investors. They are differentiated not only by the size of their investment but also by the stage they typically come in.
- Friends, Family and Contacts: The first investor type that an entrepreneur usually approaches are that of friends, family and close personal contacts
- Angel investors and angel groups: A founder can also go and tap Angel Investors. These are accomplished professionals with a high net worth and past experience in investing in early-stage companies.
- Incubators and accelerators: These are month-long programmes that help founders set up their businesses and refine their ideas. Sometimes, incubators and accelerators also invest in start-ups.
- Venture capital: VCs are the holy grail of investors for fundraising entrepreneurs and come with the biggest checks.
- Family office and corporate investors: Some enterprises go for the family office route to raise money. A family office is basically the investment arm of the founders of any successful enterprise. Just like anyone else, family offices invest in start-ups to diversify their investments.
- Private equity: Private Equity firms are deep-pocketed investors and come in at late stages.
The search for the right investor, then, should be about much more than dollar signs. Before bringing anyone on board, you need to understand how this person’s skills and resources will align with your company’s goals and vision. So, don’t jump in blind. Recognize that a big check equals a big commitment and that taking money from an investor before thoroughly vetting him or her is like getting married after your first date.
1.The Downsides Of Not Vetting An Investor
Startups with great potential can be stalled or sunk by unexpected surprises. If things fall apart, you’ll end up with an expensive legal quarrel that pulls a mountain of skeletons out of the closet. What this means is that if you accept the first investor who comes along, you’ll also likely miss out on engaging one of the secret weapons of any successful company. These experts provide much more than cash. They offer valuable connections and the knowledge to help entrepreneurs navigate obstacles that often overwhelm inexperienced startups.
2.Investors Can Leverage Network
The best method for sussing out any person’s true nature is talking to his or her friends, family and associates. Investors are no different. Make the effort to meet with investors’ partners, junior associates, analysts and other colleagues. Even a solo angel investor has partners and other connections — so invite them to coffee. Speak with several members of the team to get a real insight into what the company is like and whom you’ll be dealing with.
Committing to multiple face-to-face meetings — and the travel this often requires — may seem like a large undertaking, but it will be time well spent, you’ll have a good feel for what a partnership with the investor will bring. Remember, relationships that start as purely transactional will likely remain that way. Reciprocal and rewarding partnerships begin with open communication and trust.
3.Voice Concerns And Helps Overcome Weaknesses
Candour is a boon to young companies, especially when it’s shared constructively. Research shows that honest feedback in business settings directly correlates with the recipient’s engagement level; so, adopt the approach that your product or business model can always be improved. Look for a partner and an investor who will voice concerns early and help you overcome weaknesses.
An investor who is an earlier supporter can share concerns before investing; fortunately, this continues to concisely and candidly share feedback every few months. No business is perfect, and your investor should show a thirst for understanding your team’s ability to pivot and push through.
Looking at an investor as a single rather than a home run means Founders should not expect to get any direct operational guidance from an investor. Founders who think an investor is going to help them with the product, to acquire customers, product distribution, or any other number of startup challenges are going to be sorely disappointed. First, investors don’t want a job. They want to invest in you and have you figure it out and provide a return on their money. Second, most investors are not experts in 95% of the challenges a startup needs to overcome to be successful. Investors have their sweet spot of expertise based on their experience such in legal, accounting, sales, marketing, operations, etc., but it is a rare find to come across an investor that has a wide-ranging spectrum of expertise.
4.Investors Are Generally Good At Analyzing Marketing Or Sales Funnels
If they are former marketers or salespeople, they should be able to help you understand the “magic moment,” points of stickiness, drop off, etc. They also won’t have the biases you likely bring to the table and can look at the numbers objectively.
5.Investors Can Help Beyond The Basics
Whether they were former operators, or have just seen a large number of companies operate, investors can give helpful insight into people and culture. You can ask how to work through team challenges, enhance your company culture, or even how to make remote teams work. If they’re not the experts in these areas, they likely have companies in their portfolios that are doing creative things or learned from mistakes and are willing to share tips and tricks to avoid pitfalls as you scale.
While it may make you feel vulnerable, asking your investors for guidance around your own personal development demonstrates your willingness to grow — especially if you are a first-time CEO or another member of the C-suite. I’ve seen investors, coach leaders, on everything from how to lead their teams and handle challenging employees to how to run a great board meeting. I’ve also seen investors support and sometimes even pay for executive coaches and training programs for high-potential leaders.
Beyond headcount and budgets, investors with experience leading teams at scale can be very helpful with how to think about organizational design through various stages of growth. Investors can also have a really good sense of levelling across organizations and have seen a lot of creative approaches used across companies.
To Conclude
At a time when money is freely available, it is the entrepreneur who must choose better and choose wisely. The promise of earning a fortune is an alluring one, and to do so by the indentation of one’s imagination and hard work is an exciting feeling. Countless Indians are being drawn by the romance of it all, but a successful business requires much more. Most of all, it needs smart money.
