Let’s Talk… founder/investor fit

Investor deal

Startup founders in search of the ‘right investor’ mustn’t let themselves be blinded by the cash placed on the table, lest they make a deal with the devil… OKAY, perhaps that’s a little melodramatic, but the underlying point is valid – money alone is no guarantee of a long, fruitful founder/investor relationship.  

This week, for our exclusive “Let’s Talk…” feature examining founder/investor fit, we asked a dozen thought leaders to identify the tell-tale signs that an investor isn’t right for a startup. According to this week’s line-up, alarm bells should sound for founders if a potential investor demonstrates short-termism, cannot offer vital non-cash benefits (e.g. mentorship, domain knowledge, networks), appears preoccupied with the company’s value and exit path, fails to ask challenging questions, and has a track record of bailing on startups when the going gets tough. Commentators also noted the importance of chemistry, with the founder’s values and vision shared by the investor.

Read on for further insights from this week’s line-up:

Mike Edmonds, Chairman & Founder of Meerkats Creative Business Solutions: “The enemy of good capitalism is time. Short-termism forces the deciding factor for all decision-making to be profit. And when money-first is your mantra, true innovation and genuine market-making are rarely achieved. If Apple had only been concerned with the next quarter’s results, they would have never launched the iPod, iPhone, iPad. So, an investor that pressures you for quarterly results ahead of long-term, purpose-driven innovation won’t be right for you. Likewise, if they criticise you for investing too heavily in internal culture, or declining mergers or acquisitions you believe are not a good fit.”

David Jackson, committee member at Sydney Angels: “If your business is in its early stages, be wary of any investor who doesn’t seem interested in contributing anything outside of simple cash. An early stage investor should be able to contribute a range of non-cash benefits, such as mentorship, guidance, advice, networks, and industry-specific knowledge and skills they can use to address the specific challenges of your business.

“To be truly committed to helping you succeed, the chemistry needs to be right, and your investors’ values should also be aligned with those of you and your business. This is the only way they will believe in your business and your team enough to put in the extra time and effort needed to help you succeed – and to weather any storms that may arise at any point (and they will!).

“If an investor doesn’t tick all of the above boxes, I would not accept their cash. Cash is definitely not the most important factor at this stage.”

Julius Wei, Co-founder & CIO at BMYG: “I can think of two key signs that reveal an investor is not right for your business. Firstly, when the investor shows very little or no interest at all in your long-term growth prospects and business development. This means they are very unlikely to provide help and add more value to the company. It’s particularly important for earlier stage companies who need more than just capital from their investors.

“Secondly, when the investor only cares about the value of the company and the exit path. Every investor will want to exit and get solid returns back at some stage. But those who only care about short-term monetary returns and don’t spend time trying to understand the company’s journey tend to force the company to make bad decisions, especially in a period of volatility or a tough time for the company.”

Nazar Musa, CEO of Medical Media: A few good things to consider about investors are…

  • Have they invested in the same space before?– If they haven’t invested in this space before, then you need to assess the risk that could be involved. It could be a bit of a risk for many including investors having to learn about the industry from scratch which could mean your company or start-up is put at risk. Getting them across the investment space can be time consuming.
  • Does their thinking align with yours do they think that your business is at a further stage then it actually is, and are they aligned to that? if they do feel like the business is further a long then you believe, then this could create a problem. It’s important they’re on the same page as you when it comes to the ‘Life stage’ of your business – the indication of where the lifecycle of the business, and its growth is going.
  • Observe due-diligences of investors when they decide when to invest, if their process is basic then they might not understand your business as well as you think, and it could be time consuming and delay the process if you had to get them on the same page.
  • Are they stretching to invest? if they have to stretch to invest then think about if they really the right partner for you in an early stage business.
  • Do you like them?Perhaps one of the most important questions of all, because you have to work close with your investors, to leverage any investment with the business so you have to be able to work well with them and communicate openly. An example of this going wrong is when I invested with a friend, and I liked the friend, however our communication wasn’t professional, it was personal and that’s where things went wrong, it’s really about finding the balance between remaining professional and personal with your investor.

Jonathan Englert, Founder of Andiron Group: “If you even have an inkling that the path you want to take for your venture is long, ambitious and won’t realise a profit (or even revenue) for a while, avoid any investors you suspect are seeking short-term ROI even if they seem like the smartest of “smart money” —they will probably make your life hell.”

Edwin Onggo, Founder & CEO, GiggedIn: Here are a couple tell-tale signs an investor is not right for you:

  • It feels like they’re giving you prescriptive advice, not there to support you and your vision – Smart investors know that you as founder know more about the details of the business. The best investors of ours talk more often about principles and general approaches towards things as opposed to being caught up in the details.
  • You can tell what the quality of a person’s thinking is by the quality of their questions – I much prefer investors who ask questions which challenge my strategic thinking. It’s usually a pretty good clue that they will end up adding value along the way.

Robbie Sampson, CEO of OrbitRemit: “For me, one of the tell-tale signs an investor isn’t right for us is if they lack vision and commitment to our growth aspirations. OrbitRemit is, to some extent, an anomaly, having been bootstrapped despite readily available funding. If we take on investment, it is to support growth initiatives, so growth needs to be top of mind for the investor. And if it isn’t or if they can’t make the connection to growth and ultimate value of the company, it’s a sign they’re just not right for us.”

Detch Singh, Co-Founder and Co-CEO, Hypetap: There are many aspects to finding the right investors but for me, there are two major tell-tale signs to look out for:

  • Does the investor respect your time? – Yes, investors are typically busy and their time should be respected, but this works both ways. The best investors will value your time as much as their own. If a potential investor is already burning a lot of time during due diligence on inconsequential things, for example, they’re likely to continue to do so when they are a stakeholder in your business.
  • Will they stick by you through the ups and downs? – Building a great business is hard, and most companies will go through rough periods. An investor that supports you through the good times is great, but the bad times are when you need the most support. A good rule of thumb is to speak with other business founders who have raised money from the investor you’re speaking with. You’ll know very quickly which category the investor falls into.”

James Chin Moody, Co-Founder & CEO of Sendle: “Taking investment is never a one-way decision — generally you will be on this journey together for a long time. We have been very fortunate to have found investors that share both our values and our vision for the purpose of the company.

“My philosophy around business is that profit and purpose are deeply aligned. For Sendle, our purpose is two-fold: to help Australian small businesses thrive by making parcel delivery simple, reliable and affordable, and to have a positive environmental impact — with 100% carbon neutral delivery.  We believe that the more small businesses we help, the better we will do.

“It’s important to have clarity on what your values are as an organisation and to keep these front of mind when making business decisions — including when speaking to investors. We once rejected a $1 million investment offer because our visions for the future were misaligned.  We were Australia’s first technology B Corporation, and when the potential investor made decertification a condition of the investment, we knew that the fit wasn’t right.

“Most importantly, you should look for investors who will contribute much more than funding. Our investors are fundamental partners in our journey, and we not only learn from them, but they help us navigate the challenges of scaling an incredibly fast-growing business.”

Dave Allison, Manager at Angel HQ (New Zealand): “As with all relationships, both parties – the investor and the founder(s) – must share values and have shared expectations for the future.

“simply put, investors have to love you. When you’re running a startup, your relationships have to weather all sorts of storms – sometimes swinging from the peril of bankruptcy to the challenges of exponential growth. Will your investor stand by you when you get to the edge? Do they share your belief in the possibilities for your business?

“Investor love should not be unconditional. Investors must challenge as well as support. They should demand the best of you and hold you to the values and intentions of the business. This might get uncomfortable.

“They have to fit your life stage and needs. Do they have the experience and networks to provide the range of support your business needs? Can they help you achieve the next significant milestone in your business that leads to the growth, next funding, or exit that you are seeking? Investor groups often add value here as there is an immediate network of potential support.

“Most important of all is alignment of vision. Remember how long this relationship might be. Do you and your investor agree on what you are trying to build? How does your investor want to exit? When do they expect a return?

“If you lie to them, or even to yourself , to get the right name or money on your cap table now, you are only really securing a future argument when you can’t or won’t deliver on what was expected. Be honest with what you want and intend and hold out for an investor who wants to fund your actual intentions.”

Alan Jones, Entrepreneur in Residence at BlueChilli: “An investor isn’t right for your business when they try to pitch you another business they’re investing in. That tells me the investor is mainly interested in making lots of friends, otherwise they’d know there’s no point pitching a startup to another startup. With very few exceptions, founders don’t invest in other people’s startups. They double-down on their own.” 

About “Let’s Talk…”

“Let’s Talk…” is an exciting weekly initiative that provides entrepreneurs and industry experts with a forum to share rapid-fire views on a range of issues that matter to start-ups and SMEs. Every Wednesday, we pose a themed question to a line-up of knowledgeable industry figures, with a view to picking their brains for valuable insights to share with you, our readers.