Beyond funding: What should you look for in an investor?
Sukhendu Pal, one of the understated business leaders of his generation, looks to answer a critical question in business – are you attracting the right investors?
Most start-ups will need to raise money from investors at some point in their development lifecycle. Whether it’s to fuel initial growth or support expansion into new markets, startups will need to identify and attract smart investors. But most startups end up pitching their companies to whoever they can get and hoping some investors will buy in.
This is the most common approach, and it wastes time and valuable resources building relationships with the wrong investors who do not bring the right competencies, connections and commitment to an emerging high-growth business. What’s more, start-up founders are trained by experts/coaches to believe that their role is to “sell” the business, with the goal of attracting as many investors as possible. This is a mistake.
How to screen investors
Investors of risky start-ups come in all sizes and shapes – from start-up founders’ friends, and family members to angel investors to a range of VCs, most of whom are accountants and never built a company, to partners of VC firms, who have track records of building companies as start-up founders. Most successful start-ups I know screen potential investors – and this is how:
- First and foremost, they should have a demonstrated track record of success in investing in start-ups and early-stage companies
- They should also have a deep understanding of the start-up ecosystem and the various stages of a company’s development
- Furthermore, smart investors should be able to provide not just financial capital, but also strategic guidance and mentorship to start-ups
When screening potential investors, start-up founders should first assess whether the investor meets the basic criteria. Beyond that, it’s important to determine whether the investor is a good fit for the start-up. This means considering factors such as the investor’s stage preferences, risk appetite, sector focus and geographical preferences. Smart investors are an important source of capital for start-up companies. By screening potential investors carefully and building relationships with those who are a good fit, founders increase their chances of securing the funding they need to grow and scale their venture.
Screen investors more than money
Of course, founders’ main priority is to secure money from their investors. However, the majority are hesitant to seek advice from funders. Many founders think if they seek advice from investors then that would signal weakness. Conversely, I’ve heard many investors say they wish the founders of their portfolio companies would be more transparent about the challenges they are facing and seek help.
Based on my work over two decades with start-up founders across the world, I discovered that start-ups, who become very successful – unicorn and beyond – carefully screen their investors for a lot more than just money. I’ve seen start-up founders reject investors who only brought money to the table. These savvy founders know what they want from their key investors and how to get it.
I’ve itemised five areas (see the diagram below) where successful founders seek advice from their investment community.
Successful entrepreneurs are learning machines
In all of the above cases, if investors can’t help founders directly, the odds are very high that they’ll know someone who can. As a former start-up founder and an investor over many decades, I always appreciate the humility that comes from anyone who knows what they don’t know and asks for help.
This is because most successful entrepreneurs I know are learning machines. They’re a curious bunch and are always seeking advice and guidance from multiple sources of expertise, including their investment community. Remember these investors have invested in you, which means they want you and your company to be successful. So, go and secure investors who bring a lot more beyond money to the table.
Sukhendu Pal is an adviser to CEOs of some of the world’s most valuable companies, as well as a mentor to founders of many start-ups and unicorns across the world.