Why you should research your investors – and how to do it

Joel Svensson

With insufficient capital being one of the biggest killers of startups, it can be tempting to secure funding at all costs. But should you open up your doors to just anyone?

Once a firm or individual invest in your company, they essentially become a team-member who is incapable of being fired. Good investors will provide connections, mentorship and guidance. On the other hand, a controlling or excessively demanding investor will put strain on your relationship, damaging the impetus of your business.

Which is why it’s so important to do your due diligence in screening investors before you approach them.

Here’s how.

Look at their past investments

A good indicator of how an investor operates is to look at their history. Examining

the companies they’ve invested in – their timelines, how they were handled, whether any conflicts emerged – is a good way to get a sense of their M.O. (modus operandi).

If you find yourself in talks with a potential investor, ask them about their past successful and failed investment ventures, just as you would ask for references in a job interview. Then, take a closer look at those companies yourself.

Look at their location

Location might not mean what it once did in this new global economy of ours, but depending on your product, it can still be a make-or-break component of your operation.

Geographical proximity will affect your company’s attractiveness as an investment option. Not being able to stop by and check out the project in situ can be a deal-breaker for many investors. Long-distance investing is not unheard of, but it’s better to hedge your bets.

Look at compatibility

As in any relationship, it’s important that you and your investor are on the same page about certain things. Vision, ROI timeline and scale of growth are some of the most important points you’ll want to agree on. Some investors favour a particular type of business model. Others might prefer late-stage investment to providing seed capital.

On a more personal level, investors often look beyond the numbers to the people behind them. Your professional background, interests and hobbies are all of interest to your investor; it lets them know the kind of knowledge and passions you harbour. By the same token, you’ll want to look at potential investors’ backgrounds to determine if they’re the kind of people with whom you’ll want to do business.

Look for connections

Warm leads are always better than cold-calls. Ask around and see if you can have someone set up a face-to-face. LinkedIn, of course, is an invaluable resource for this kind of stuff.

Getting some facetime is a great opportunity to size up the investor and see their business style – are they hands-off, collaborative or controlling? Remember, your investors essentially become your partners for better or worse. Make sure it’s “better.”

Joel Svensson

Joel Svensson is a Melbourne-based freelance writer specialising in politics and business.

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