Entrepreneurs seeking start up or growth investment capital should be careful not to jump too quickly at an offer. Even if a potential investor is given only a minority or restricted interest in a company, due diligence is essential to determine whether the investor is the right fit for the company. Accepting the wrong investment may expose the company to a litigious shareholder with unrealistic expectations, an unwanted advisor, a broker posing as an investor but really acting for other undisclosed investors, or merely a naïve party who does not understand the business. A slow and informed investor vetting process is much more likely to lead to a happy and long lasting investment relationship. There are several easy steps, often overlooked, that an entrepreneur can take to achieve such a relationship.
Always request references and follow up on them. Make sure the references are the people at the company with whom the investor dealt most closely. Once you have the initial references, ask for two more so you have an opportunity to speak to people who were not on the top of the investors’ relationship list and may have a different, more relevant insight into the relationship.
Armed with a list of references, don’t be shy in asking the tough questions. For example, ask the reference to describe a troubling time for the company and explain how the investor reacted, what was the best thing about how the investor addressed the problem and what was the worst thing. Use social media to locate mutual contacts who may know the investor in other capacities and can offer additional insight.
Moving into the negotiation phase, realize that negotiations can be used as a tool to learn more about the investor. Proceed slowly and thoughtfully, considering how the investor prefers to communicate, how honest and transparent the investor appears, how the investor handles disagreements on terms, how responsive the investor is, and the investor’s overall personality.
Meanwhile, fully investigate the investor’s track record. Consider the success or failures of previous investments, resignations and the surrounding circumstances, and even litigation history. If the investor has a pattern of behavior apparent in his or her track record, the future may not yield any exception.
If you have watched Shark Tank, you have seen how a difference in an investor’s personality, experience, and expectation can affect a company owner’s decision about choosing the right investor. In the end, your trust in an investor and confidence in his or her fit with your company’s objectives is key. Learn all that you can, seek legal advice from a source you trust, and follow your best, informed instincts.