You’ve launched your business, demonstrated product-market fit, and are generating serious traction. Investors are taking your calls and you might have even been offered a term sheet or two. Congratulations!
But before you accept an offer, take a moment to reflect and research. Not every investor is your golden ticket, and just because you’ve been presented with a fair term sheet doesn’t automatically mean you should sign. The funding amount and valuation is important. But equally as important is making sure your investors are the right fit.
Here are just a few questions to ask to make sure your investors are right for your company, team culture, and mission.
Have they had success investing in similar companies?
Most of the time, your investors will have previously invested in other companies. It would be a huge red flag if you were their first investment. You can –– and should–– thoroughly research their past investments.
If they do have previous investments, how many were successful? Every investor or venture capital firm is going to have misses in their portfolio, but if they significantly outnumber their successful exits, figure out why. What went wrong in all the deals that didn’t work out?
Additionally, of their portfolios, do they seem to demonstrate expertise or a focus in a particular industry? Ideally, you want to align with one who deeply understands your industry or vertical. For instance, if you have a software-as-a-service company, it would make sense to want investors who have already had success investing in similar companies. It means they can provide better guidance and likely already have beneficial connections in the industry.
Do they have good relationships with their other founders?
Having a strong relationship with your investors can make or break your company, especially when things aren’t going perfectly. While every situation is different, an investor or venture capital firm’s relationships with past investors can be a good indicator. So reach out to past or current founders who worked with the investors –– and don’t limit this to just the successes. Talk to founders of portfolios that didn’t work out. This will give you insight into how they respond during tumultuous times.
How comfortable did they feel talking to their investors about different problems? Did they trust them enough to actively seek out their advice? How controlling were they? How did they handle situations where things didn’t go exactly as planned?
That last one might be the most important. Every business, from Amazon to the local pizza shop down the road, has had things go wrong. Something unexpected will happen. It’s a guarantee. You need investors who will stay calm and help you get through it rather than panic.
Have they been in your shoes before?
Great entrepreneurs don’t always become great investors, and great investors aren’t always great entrepreneurs. But having investors with experience as an entrepreneur or CEO before is still important.
In any other profession, you would want to be guided by someone who has already done it before. Entrepreneurship shouldn’t be any different. You want to have help building a team from someone who has successfully done it themselves in the past. You want to scale your company with the guidance of someone who scaled their own company. It makes it a lot easier for you to lean on them and trust their advice.
Investors who founded companies also understand what you are going through better than other investors. They know the struggles that come with being a CEO, and they especially know how frustrating an overbearing investor can be.
Will they provide the right amount of guidance without being controlling?
The ideal investor knows exactly how much coaching to provide. Obviously, experienced investors have been there before. They should be willing to give advice, lend their own resources, leverage their connections, and help in whatever way they can. An investor that truly understands and cares about the business will do whatever he or she can to make it successful, which extends beyond just providing money.
On the flip side, you don’t want an investor who is too controlling. You put in the work to get your startup to this point, so you should be the one running the company. You are the CEO, not your investors.
Good investors provide resources and advice but know when to take a backseat and let the founders and leadership team run the company.