When it comes to investors, severing ties or hitting the reset button is simply not an option. Your partnership is a long-term commitment, making it imperative to thoroughly evaluate potential investors before taking the plunge. Let’s explore a comprehensive approach to help you navigate this process effectively.
We’ve all heard the cautionary tales of mismatched VCs and startup founders/CEOs, featuring politics, strained relationships, shattered trust, and ultimately, the demise of promising ventures. Are VCs inherently flawed, or is it a matter of certain individuals simply not being compatible?
VCs carefully scrutinize your character, operational approach, interpersonal skills, and your ability to attract exceptional talent, partners, and other investors. At the initial stages, they primarily focus on assessing the quality of your founding team.
Unfortunately, many founders overlook the fundamentals: by partnering with investors, you’re essentially bound to them for 7 to 10 years, or even longer, with no easy way out if the match proves to be disastrous. Conducting thorough due diligence on potential investors is an absolute must. As the CEO, it’s your responsibility to assess and identify investors who are a suitable fit, and this duty rests solely on your shoulders.
When engaging in negotiations with VCs, it’s all too common for founders to rely heavily on their instincts and gut feelings, overlooking the necessity of conducting due diligence on investors. Sure, the clock may be ticking, and the financial offer may be tempting, but if there’s no compatibility, it’s a deal-breaker. Period. Discovering post-investment that one of your investors is a bully, a fraud, or an egomaniac can be devastating. Unfortunately, such characters exist, and it’s your duty to identify the exceptional ones amidst the crowd.
Every founder has unique requirements. You can simplify them to three essential qualities: (1) a collaborative mindset,
(2) attentive listening skills, and
(3) a reputation for keeping promises.
Furthermore, choose investors who demonstrate a willingness to lend support when needed.
Conducting meticulous due diligence on potential investors is paramount to ensure they align with your company’s values and your personal vision. While gut feelings can play a role, they should not be the sole determining factor in making this critical decision. Remember, a successful and fruitful partnership depends on thorough evaluation and finding the right investor who complements your aspirations.
Practical Strategies for Evaluating Potential Investors
When it comes to choosing the right investors for your startup, thorough research and evaluation are paramount. Let’s go through some steps that will help you efficiently assess potential investors and make informed decisions.
1. Seek Insights from Other Founders/CEOs
The tech/digital industry is known for its progressive nature, with CEOs readily sharing information and recommendations. Take advantage of this community by reaching out to fellow founders for their experiences with potential investors. Specific questions about events and practical scenarios often yield valuable insights. Remember, your peers’ input can be more informative than any other source.
2. Personal Connections and References
While some VCs may provide references, it’s essential to go beyond the curated list and seek direct input from CEOs who have worked with the investors. Calling CEOs directly can reveal valuable information. If a VC discourages or objects to you reaching out to their portfolio companies, it might raise concerns worth exploring. Face-to-face meetings are preferable, as they allow you to gauge facial expressions and body language, providing deeper insights into their thoughts and attitudes. Pay attention to how CEOs describe the investors, noting any signs of overconfidence or fabricated knowledge.
3. Building Patterns through Multiple Interactions
Don’t rely on a single meeting or conversation. Aim for at least three to five interviews, such as short chats or coffee meetings, to establish patterns of behavior and compatibility. These brief interactions can be invaluable in determining whether an investor is the right fit for your business.
4. Checking Reputation and Feedback
There are platforms that provide anonymous insights into the experiences of founders who have dealt with specific investors. While caution is necessary to filter out extreme negativity, these platforms often unearth valuable information and give you a broader perspective.
5. Unveiling True Interests and Knowledge
Use tools like venture capital search engines, to explore the topics, tags, and insights shared by specific investors. This can help you assess their real interests and expertise, allowing you to align their claimed focus with their actual knowledge.
6. Assessing Personality Beyond the Office
Investors can appear polished and charming within the confines of their offices, but to truly understand their character, take them out of their comfort zone. Engaging in activities like walks, hikes, meals, or drinks provides an opportunity to observe their behavior in real-life situations. Notice how they interact with you and others. Do they prioritize their phones over conversations? How do they treat service staff? One unconventional technique is “accidentally” spilling a glass of water and observing their reaction, which can reveal important aspects of their temperament and engagement.
By following these practical tips, you can delve deeper into potential investors’ compatibility, reputation, knowledge, and true character, enabling you to make well-informed decisions for your startup’s long-term success.
How to Uncover the Real Person Behind the Office Persona
In the journey of building a business, stress is inevitable. And during the 7 to 10 years of partnership with your investors, you need to know how they react when faced with challenging situations. This is where you get to see their authentic personality, far beyond their polished office act.
Once you’ve established the potential of your company, good investors will gladly invest a few hours to collaborate with you and your team on specific strategic issues. This collaborative session will shed light on their ability to help you shape your vision, set realistic goals, and provide valuable advice to unleash your company’s full potential. One effective way to test this is through a whiteboard session, where ideas and insights flow freely.
Directly ask the Investor questions you want answers to. The list of questions to ask an investor is vast, but a few carefully chosen ones can reveal a great deal about their behavior and mindset. Observe if they take responsibility for mistakes, share the burdens faced by other founders, or believe they are faultless. Some topic ideas to explore include their worst experience with a CEO, the most challenging situation they encountered with a founder, how they handled firing or replacing a founder, and their biggest disappointment with a CEO post-investment. Take note of their responses, and compare them with other CEOs’ stories to separate truth from exaggeration.
Final test is Psychometric Assessment. By now, you should have formed an initial impression of the investor. If everything aligns well, consider proposing a psychometric test. Many investors already have one in place, requiring no additional effort. Make it a two-way process, suggesting that both parties undertake the assessment to understand each other’s strengths and weaknesses. Highlight that it’s about building the strongest possible team and managing expectations realistically. While the tests won’t reveal everything about an investor, they can provide valuable insights within a 45-minute investment.
Conducting due diligence on investors may seem like an arduous task, but it is essential for the long-term success of your company and team. A bad investor relationship can have detrimental effects on your business. Take the time to do thorough research and ensure compatibility with your potential investor. Legitimacy concerns can be addressed by identifying rogue investors and examining term sheet clauses that could jeopardize your business. Remember, finding the perfect match is worth the effort.
As you embark on the journey of building your business, remember that choosing the right investors is a decision of paramount importance. Thoroughly evaluating potential investors is vital for long-term success, ensuring alignment, trust, and shared goals. By following a comprehensive approach that includes seeking insights from other founders, conducting personal references, building patterns through multiple interactions, checking reputation and feedback, unveiling true interests and knowledge, and assessing personality beyond the office, you can make well-informed decisions.
Additionally, don’t shy away from asking direct questions and proposing psychometric assessments to gain deeper insights into potential investors’ behavior and mindset. Remember, due diligence is a small investment of time compared to the long commitment you are making. Ultimately, finding the perfect match is worth the effort and will contribute to the success of your business. So take your time, conduct thorough research, and build a strong and supportive partnership with the right investors.