What makes a good investor? And how should you go about finding someone who possesses the right qualities?
A pretty significant number of entrepreneurs who pursue venture capital believe the answer to these questions is simple: follow the money. In theory, it makes sense: What better indicator could there be of an investor’s success than their wealth? Isn’t that what investment is all about?
Not really—at least not for you, the business owner on the other side of the deal.
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While profit is indeed a core component of an effective investment strategy, it is only one outcome among many. When that result primarily benefits the investor, something’s not right.
As Palo Alto Software founder and business writer Tim Berry insists, “pick an investor like you'd pick a spouse.” Just as there are obvious drawbacks to marrying for money, choosing an investor based on the size of his or her resources alone is a short-sighted mistake that can cost your organization.
With that in mind, here’s a checklist of questions you can ask yourself to ensure you’re approaching the right person or VC group when seeking investment.
7 questions that will tell you more about an investor than their bank account
Is the investor legitimate?
Before meeting with a potential investor, conduct some research on your target. Consider how long they’ve been in operation, how they present themselves, and how easy it is to access information about them, as well as what companies they’ve supported and how those companies have fared.
The investor’s website and presence on social networking sites such as LinkedIn are good places to start. Look for recent activity, endorsements, press releases—anything that shows that your target is alive, visible, and accountable. While fake investors are rare, they pose a serious threat to your business and intellectual property. You probably don’t want to share confidential details like your financial status and client list with just anyone.
Does the investor “get” your business plan?
When pitching your business to an investor, pay very close attention to his or her reactions. Worthwhile investors are great listeners: they will nod along, ask questions, and repeat what you’ve said back to you. They’ll show enthusiasm and keen judgment at the same time.
Bad investors, by contrast, come to the table with nothing but preconceived notions about your and your organization: they’ll steamroll your pitch with their own ideas or show little interest in anything other than your financial projections. They may rashly commit to saying “yes” or seem entirely unmovable. Look for a yellow light rather than a pure green or red.
Do you understand what the investor wants?
How forthcoming is the investor about his or her objectives? There’s a fine distinction between discretion and circumspection. Even if your target isn’t hiding anything, per se, ambiguity regarding their goals could signal a deep uncertainty or reluctance to take charge.
Without a clear internal course of action, an investor has little incentive to spend their money. Moreover, it’s imperative to avoid any individual or group that would pull out or change their mind without warning. Look for someone committed, careful, and tactically-minded, but still motivated to assume risks when necessary.
Does the investor have a sound exit strategy?
Good investors seem like prognosticators not because they know what will happen in a certain market, but because they understand how to plan for any outcome. What would a successful exit look like for your investor—and for you?
When contemplating the best and worst case scenarios following investment, assess what your target intends to do through a multifaceted lens:
- How far in advance are they forecasting?
- Is the forecast realistic?
- Between going public, a buyout, and a merger or acquisition, what options are beyond consideration?
- What factors are non-negotiable?
Talking through exit strategies at the outset will help you and your investor gauge expectations and thus work together more effectively.
Is the investor stable, consistent, and professional?
Take stock of your investor’s emotional state: Do they anger or panic easily? Volatility means unpredictability, and unchecked emotions could lead to a financial disaster or legal conflict down the road. Consider the target’s professionalism as well: Are they organized and timely or do they disappear for weeks at a time?
An investor may have the best intentions, but if they’re too busy or disorderly to engage fully with your business, they aren’t worth the effort. Avoid any behavioral tendency that could cause or exacerbate miscommunication.
Is the investor up-to-date on your industry?
An investor should certainly have experience, but perhaps more crucial is a solid understanding of the current business landscape. Your target needs to be at least as knowledgeable as you—and hopefully more so—about trends and developments in your industry, or else their investment could be mishandled or the cause of bitter disagreement. Armed with insight into your unique situation, an investor can fully appreciate why you’re looking for the amount of capital you’re seeking rather than second-guess your motives.
Does the investor demonstrate a willingness to admit and learn from mistakes?
Finally, seek out an investor who can admit they’re only human. When speaking about their backgrounds, portfolios, strategies, and philosophies, successful investors frame their histories as continual learning experiences. They take pride in their mistakes, as each one constitutes a valuable lesson they would have otherwise missed. And once they learn, they implement changes quickly.
This consideration isn’t merely about steering clear of potentially toxic, ego-driven personalities; it’s also a measure of rationality. If an investor can come to terms with their mistakes, chances are slimmer they’re making an error in supporting your business, and the longer they’ll be able to stick around.
Choosing an investor is one thing—convincing them to invest is another matter entirely. At inDinero, we work one-on-one with entrepreneurs every day, and we’re happy to offer free resources for decision-makers at small businesses, startups, and other organizations in the midst of growth. Check out our other articles on securing investment:
- Why Investors Hate Your Startup and How to Change Their Minds
- Can You Answer These 9 Investor Questions About Your Small Business?
- What Investors Really Want to See for a Series A Funding Round