There’s always a great deal of talk in the entrepreneurial community about how to attract investment. It’s not hard to see why: securing the necessary funds is almost always a fledgling business’ top priority.
But speaking as someone who has been an entrepreneur before becoming an investor, it’s essential that whoever you receive finance from is a great fit for your business. Money is a prerequisite, but so is philosophical and professional alignment. When investors can contribute strategically, they can turbo charge your company’s growth. Conversely, if an investor isn’t on the same page as you, the consequences can be dire.
Start-up business is all about the people, therefore who you take money from is just as critical a question as who you hire. Drawing from my experience on both sides of the table, here are my five key criteria for a great investor.
Strategic expertise and experience
The best investors leave decisions in your hands and respect your authority as CEO, but they’re also not afraid to speak their minds and voice thoughts and concerns that they’ve amassed through experience. If they’ve invested in a company like yours before – or even run one – then they’ll have first-hand knowledge of the various pitfalls and opportunities that lie ahead of you.
To start a business is inevitably to make errors. But an experienced investor will have made errors of their own and typically, they’ll be able to tell you how to avoid them. If you’re going to make mistakes, they might as well be new ones! An investor who has ‘been there, done that’, is worth a lot to any new business.
Compatibility
Being co-shareholders is a bit like having a child: you both have responsibility for this organism that you’re raising and nurturing together, and individually, you might both be excellent parents. But you’ll be even better if you can work together to take care of it and help it grow up.
Compatibility is vital to your relationship with your investor. You’re embarking on a long journey: one that will be occasionally joyous, occasionally maddening, and hopefully hugely rewarding. So it’s best to be on the same page from the very beginning. If their ideas for the direction of the business are irreconcilably different from yours, and you don’t like each other as people, it’s better not to get together in the first place.
Contacts
So much in business is about relationships, and the right investor will have a large network of contacts that they can use for the benefit of your business. Whether it be sourcing other investors, partners or customers, building your network will be accelerated by being able to piggy back on their contact book.
To them each investment is not a solitary, stand-alone venture, but a part of a wider connected whole. Great investors will weave you into their contacts ecosystem and from there you will find opportunities that you never knew existed.
A strong track record, without an overblown ego
Being able to talk to others who have worked with your investor is critical. If your financier can point to past successes in your industry or other relevant industries, that should give you confidence that they’re good to work with. Even better if they can point to specific examples of how their influence helped businesses like yours grow and achieve their potential.
Importantly they should be suitably secure that they happily introduce you to any of their previous investments, even those that did not go so well. So before saying yes to that all-important cash injection, talk to some people they’ve worked with before. Get an idea of the character, temperament, and strategic vision of your prospective co-shareholder, and decide for yourself if they’re a good fit for you and your company. Having these conversations before you take their money will head off potential problems later on.
Empathy
After a lifetime of watching unflinching, steely-eyed captains of industry turn down good ideas on Dragon’s Den, empathy is not exactly the first attribute that springs to mind when you think of investors. But the truth is that a great investor has it in abundance. They need to know how you feel: to understand your emotions and sentiments and to intuitively get what will and won’t demoralise or motivate you and your team.
For example, we recently took a 10 per cent stake in the Free Postcode Lottery. We would have loved an even bigger slice as we see great opportunities for growth and believe wholeheartedly in the business model. But if we’d asked for too much, we would have also risked harming the team’s morale and curbing their motivation to succeed: every percentage point we take is a percentage that’s unavailable to lock-in and motivate the team.
So we’re content with our 10 per cent for the moment – and in the knowledge that, if they need follow-on funding or want to exit the business once it’s successful, we’ll be a very attractive option.
When you take money from an investor, it’s essential to remember that, for all their financial risk, you’re also taking a chance on them. The future of your business is at stake: if you’re going to hand over your precious equity, make sure you’re handing it over to the right person.
James Oakes is director of ZEAL Investments.
Further reading on investments
