If you’re heading up a startup, chances are that you’re going to need investors to fund your business. When you’re getting financial help for someone, you’re, in some ways bringing a business partner on. You want to learn as much as you can about the person to ensure that they’re going to be someone you can see yourself working with. You also want to check out the background of investors so that you feel comfortable with them and trust them.
The following are five tips for startup founders to keep in mind to thoroughly vet their investors.
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1. Ensure Your Goals Are Aligned
When you give up equity in your company, it can create problems in decision-making because the new investors might want partners to be more aggressive. An owner needs to understand the expectations of an investor before taking their funding, ensuring there’s alignment in your visions.
A good investor is someone who becomes your strategic partner. They’re helping fuel the growth of the business. A bad investor is someone who might push only for what will serve their own agenda.
When you’re talking to possible investors, try and figure out not only their goals but also their exit timeline and how they want to get from one point to the next. Then, you’re in a position to assess whether that’s going to align with your vision or not.
2. Determine Their Value
When you’re vetting investors, what value do they bring to you, and how are they going to be able to help you? Along with sharing your mission and values, if they don’t bring something unique and distinctive to the table, they could end up being more trouble than they’re worth for your business.
As a small business owner, you need to go into the process of vetting a partner by understanding that just about the money. Yes, money is important, but without investors who support your vision, you’re not likely to achieve success. You want investors who can play an advisory role, so their experience, reputation, and education are things to consider.
3. Understand Their Risk Aversion
A good investor is one who’s going to be risk-averse. That’s because they should have knowledge and experience that leads them to that point. An investor needs to understand how to handle the possible risks that can come from investing without jumping ship if things aren’t going well.
Before you seal a deal, take steps to analyze and understand their risk aversion.
Then, you’ll be able to enter a partnership based on mutual understanding and trust.
4. Check Them Out Online
Above, it was mentioned that you should check out possible investors online. You might run their name through a people finder to see what comes up. These search tools will consolidate things like social media profiles, email addresses, and phone numbers.
Looking at someone’s online footprint, and especially their social media, can help you learn a lot. You can spot potential red flags that you wouldn’t otherwise uncover until later in your relationship. See what they post on social media and who they’re following.
If someone has a troubled or problematic personal history, or they get a lot of negative media or public attention, this isn’t something you want to associate your business with. It’s also possible that trouble doesn’t just follow this person—it could be that they’re the ones creating it. Unless there’s a good explanation for negative press, if you uncover it, consider walking away from the deal.
5. Ask About Their Successes and Failures
A lot of the vetting that you’ll do to assess potential investors for your startup will rely on the conversations you have with them. As a founder, you want to ask investors to provide you with examples of their success cases and their failures. You want to see how the investors helped in both situations and how they dealt with the failure.
It’s easy for someone to talk about their success but much harder to disclose their failures.
Once you have the conversation about successes and failures, you can do your research to compare what they told you with what you found out, indicating their reliability. Everyone’s going to try to make a good impression, of course, but honesty is needed because you have to feel like you’re doing business with someone you trust.
Finally, always meet more than once with potential investors. You need to talk about strategy and goals. You could end up meeting as many as five times before you decide how you both want to proceed.
