9 Ways to Vet an Investor Before You Seal the Deal

December 24, 2017

12:45 pm

Locking in an investor is one of the best moments for an entrepreneur. However, it’s important to remember that not every source of capital is worth the hassle. That’s why you need to make sure to vet every investor prior to sealing the deal. But how?

We asked nine entrepreneurs about their favorite way to vet a potential investor before locking in an agreement. Take a look at what they had to say below:

Talk to Other Companies They Have Invested In

“By reaching out to Founders and executives at other companies that your potential investor has invested in, you’ll be able to get a sense of how hands on they will be, what type of advice or value-add they provide (aside from cash), and overall whether or not it was a good experience. This type of information will help you decide whether that particular investor will match what you are looking for.”

– Diana Goodwin of AquaMobile

Find Out What Value They Provide Beyond Money

“Ask your investor to articulate exactly what value they will provide beyond writing a check.  If they can’t confidently and clearly articulate their value, you should not move forward in working toward terms. Ask them to explain how they delivered this value to other investments and how they can do the same specifically for your startup.”

– Andrew Thomas of SkyBell Doorbell

See How They Handle Negative News

“The only way to truly know a potential investor’s character is to go through tough times with him or her. To simulate that, strategically surface negative news and gauge their reaction. How they handle it will speak volumes.”

– Sean Kelly of SnackNation

Research the Investor Online

“It’s amazing what you can find out about a person or entity by doing some thorough searches online. Research their background, prior investments, LinkedIn, business websites, online articles, press mentions, etc. Look for any red flags and validate any statements made. With social media and the amount of content published online, you can verify and uncover a lot about most individuals or entities.”

– Shawn Schulze of HomeHealthCareAgencies.com

Discover if They Have a Willingness to Participate in Follow-on Rounds

“Unless your startup is witnessing hockey-stick growth, expect to raise multiple ‘bridge’ and/or ‘seed’ rounds before you raise Series A. If existing investors decide not to join a follow-on round, it sends a negative signal to other investors. Dig into the investor’s past track record and measure how often they have participated and/or led subsequent bridge rounds. Stay away from the one-timers.”

– Vishal Shah of NoPaperForms

Know Whether They Can Take on a Lead Role for You

“Investors typically know and work with other investors. Should you have to raise more money, they should be willing to take the lead on helping you raise. This type of investor is very important to have early on in your company as it will dictate success in future rounds.”

– Andy Karuza of FenSens

Talk to a Previous Company That Had A Period of Failure

“The true test of a great investor is how they react when times are tough. Do they disengage? Provide helpful guidance and introductions? Do they redouble their efforts? Every investor has had struggling investments. Find out who in their portfolio went through tough times and get the skinny about what it’s going to be like for you when you face your most important challenges.”

– Trevor Sumner of Perch Interactive

Focus on Investors Who Grasp Your Business Quickly

“Having raised around $5,000,000 from a variety of investors, I’ve learned that those who grasp the business quickly will be the best investors. Don’t waste time explaining your business model, including your value proposition, profit model, key resources and core processes to an uninformed investor. Instead, focus your time and energy with those who intuitively appreciate the opportunity.”

– David Ciccarelli of Voices.com

Share Your Vision

“Do you share your vision with the VCs you are looking to get money from? Two things you would get to know: 1) Whether the VC would be a partner in your vision and help you refine it as you progress, and 2) If there is disagreement regarding the vision of the company, how would you two sort it out? It is very important for you to be open and transparent with VCs since you are looking for a partner for next three or four years with them.”

– Shilpi Sharma of Kvantum Inc.

Read more about finding funding on TechCo 

This article is courtesy of BusinessCollective, featuring thought leadership content by ambitious young entrepreneurs, executives & small business owners.

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Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world's most promising young entrepreneurs. YEC members generate billions of dollars in revenue and have created tens of thousands of jobs.

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