Five-minute money masterclass: choosing the right investor

Aside from the buzz of launching one’s venture, there is little more exciting for an entrepreneur than securing a sizeable investment of capital to help take things to the next level.

Five-minute money masterclass: choosing the right investor

However, it is not often just the money on offer that whets the appetite of the business owner. The very people stumping up the cash are often of as much, if not more, interest because of the business acumen and experience they can bring to the table. Moreover, a sacrifice of equity – or at the very least a seat in the boardroom – is a regular by-product of investment deals. In that sense, it pays to be happy with the person or company you will be working with going forward and who, ultimately, will potentially be wielding significant control over your business. How, then, can an entrepreneur go about choosing, and securing, the right investor when the time comes?

 Know what you want

Only by identifying the precise need for investment will an entrepreneur stand a chance of securing the investor, or investors, who best fit their business. “First of all, the entrepreneur needs to be in a confident position,” says Darren Fell, co-founder and managing director of online accounting service Crunch. “The second the investor can smell there is a desperate requirement for cash, it changes everything and you often get the wrong investor who wants to sit on your board, control things, and direct it in a way that you don’t want to be directing it.” Indeed, determining exactly what you are looking for has a bearing on the type of investment and investor that would be most suitable. “There is a huge difference between a person who is just giving you some money and a person who brings a lot more than money to the table,” Morgan Pierce, CEO of employee referral platform ReferStar. “Maybe they are going to actively roll up their sleeves and introduce you to people who might be able to move your business forward, or bring knowledge in terms of what you are trying to accomplish.”

 Establish some trust

Bringing an investor on board essentially marks the beginning of a long-term relationship, the maintenance of which is crucial to the success of an enterprise. The entrepreneur must therefore have faith that the personality of their chosen candidate is compatible with theirs, and that they can confidently confide in them at any point. “Sometimes it is really hard to say to yourself ‘I am not going to take this person’s money because actually I don’t really want to work with that person’ when that might be the only lifeline you are being given,” explains Pierce. “But if it doesn’t feel right, it’s not going to get any better once the money is in your bank account. It is only going to get worse. The anxiety and the tension is only going to be exaggerated because if you don’t get along, they are going to start pounding their fist and wondering when they are going to get their money back.”

 Ensure you are on the same page

An investor doesn’t tend to part with their cash lightly so they must have a vested interest in your business proposition to take a punt. More than this though, an entrepreneur will rest easier if the investor shares the same passion and ambition for their enterprise. “In my experience, where the investment has worked well, there has been a good cultural fit between the investee company and the investor, be it a professional investing entity or an individual,” says Nigel Stanford, partner and head of corporate at law firm Cripps Harries Hall. “That might come because they have a similar approach to how they want to run the business, a similar sort of vision about how the company is growing and developing, what networks the investor has and how well-connected they are.”

 Think global

It’s almost a given that any start-up seeking significant investment is probably one with sizeable, potentially international, ambition. Therefore, finding an investor who has spent some time overseas is a plus in this regard. “Obviously, if global expansion is a huge part of your growth plan, having people who know local markets is going to be essential,” says Sarah Abrahams, investor manager at business support service GrowthAccelerator. “Although you might know there is market demand, it is going to take a lot of time to know which different firms you need to talk with to access customers. An international investor who also knows the sector will probably know the companies in that country you need to be talking to and they can set up meetings for you. They can almost come on board as an ‘equity employee’ so they are investing money but also working for your growth plans.”

 Get a second opinion

Whilst exciting, taking on investment will usually be something new and alien to the majority of start-ups. Thankfully, there are people out there who know the best places to turn and how to secure the best deal for you and your enterprise. “The most important thing when establishing a relationship with an investor is taking advice from a third party,” says Charlie Green, co-CEO of collaborative working space provider The Office Group. “When you are just starting out, you may know your business but what do you know about corporate finance and the world of shareholders agreements? We found that the deal we structured at the very beginning in no way reflected the performance of the business as we grew, but we didn’t have any provision in there to change it. So having the advice from somebody who does know how to tackle these things can be very helpful.”  

Adam Pescod
Adam Pescod

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