4 Things I Didn't Know About Investors Before I Took Their Money
Nowadays we see a huge amount of articles about how entrepreneurs should meet and engage investors. In fact, the startup world is so obsessed with getting funded that nobody ever talks about the risks or downsides. So, you cashed the cheque, now what? Knowing how to manage investors is an important skill that new entrepreneurs have to learn and sometimes the hard way. I could list a million things I didn’t know about investors before I took the money but for the sake of clarity I will tackle the top 4.
1) Receiving investment is like getting married - but at a shotgun wedding
In the early stages everyone is happy and excited. Both sides woo each other with less-than-subtle compliments, dinner and a few rounds of drinks. They might stop by the office to check out your processes, and invite you back to theirs for a tour. I like you, you like me, your numbers add up, the term sheet looks good so lets bring in the lawyers and get married.
That's the easy part. Once you get to the paperwork it can feel like you're negotiating a painful prenuptial agreement where everyone is questioning each other's trust and work ethic. In reality, both sides are trying to make sure their best interests are down on paper just in case everything goes wrong. You have to get through this without taking their criticism personally - a key part of learning how to manage investors in general.
Take your time to ask the right questions about their culture and practices because - after all - you're going to be contact with these people on a weekly or even daily basis. Try to reach out to other businesses that they've invested in and ask about their relationship. Just like dating, everything your partner does is cute and innocent until you're faced with it day in, day out. That's when those little habits of theirs - daily calls at 7 A.M., weekly steak dinners, etc. - become highly annoying. In short, do your research and don’t get blinded by the money.
2) There’s no such thing as a silent partner - they communicate through loud whispers or yelling
If you've ever invested in or lent to someone yourself then you'll know how difficult it is to stay quiet about it. You can't expect someone who has given you thousands or even millions in funding to not want to have some sort of influence over how you spend it. Yet many entrepreneurs are still surprised. No matter if they own 1% or 51% of your business, they are trusting you with their hard-earned cash. Whether they know what they're talking about or not, be prepared to at least let them talk.
Set and manage expectations from the start. Be wary of how often you call your investor asking for advice and resources because this might make them feel less confident about you, your team and your network. Like a child of overprotective parents who just had their curfew extended, don’t give them reason to worry or keep checking up on you. Your every move should make the investor feel able to let you run your business the way you want to run your business.
3) You need more than money
It's so easy to get distracted by those dollar signs. Remember that the money alone is not enough. Be sure to clearly express your needs to your investor and determine what resources or opportunities they can provide in addition to cold, hard cash. Can they open the right doors for you? The right partner should be able to not only assist you financially but also offer unique chances to accelerate your growth. They are there to help make sure that your business is a success. So use them effectively.
4) Define your exit plan before you sign, because they have
Just like at a shotgun wedding, your partner is unlikely to be planning on growing old with you. The majority of investors are concerned about the return on investment. Many investors simply don't invest unless they have first identified a potential exit route and an estimate of the exit valuation.
Some of the best advice I received a few years ago was to always treat your business as if you are going to sell it - even if you're planning to keep it in the family for generations. This gets you into a scaleable mindset from day one.
When you take on an investor it's a little different. You have three options for the future: sell your business and cash out, sell and stay on to run the business as an employee, or make enough money to eventually buy out your investor. Your investor is not a charity - they are looking to cash out one way or another and have made that decision before handing over the term sheet for you to sign. Accepting this is the first step in learning how to manage investors.
My tip? Plan your own exit before you get the term sheet.
Have you been trying to find investment without any luck? Here are 10 potential reasons why investors aren't investing in your startup.
Maybe you're thinking about turning your back on investors completely? Check out these 5 ways to bootstrap your company's finances.