Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launched BusinessCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.
What’s one smart way to vet a potential investor before sealing the deal?
1. 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.
2. 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.
3. 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.
4. 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.
5. Break Bread Together
Always meet in person before taking on a new investor. I recommend dinner or drinks to allow enough time for a thoughtful conversation. Too many entrepreneurs rely solely on email, social media and conference calls, but that will only tell you part of the story and can get you burned. I know it’s old school and a bit inconvenient, but all the research in the world can’t replace a handshake.
6. Consider a Lawyer
What many fail to realize is that you usually aren’t your own boss after getting funding. Investors can say that they’re on board with your company’s vision and core values, but might be singing a completely different tune after you sign the papers. That’s why I’m a huge fan of bootstrapping. If you really must get funding, do the research and consider a lawyer to make sure you retain control.
7. Ask for References
It’s important to ask for references of entrepreneurs the investor has previously backed. Set up calls with the founders to get the inside scoop on their experiences with the investor. A good investor will open up their Rolodex of contacts and offer to make an email introduction. If they are not willing to do so, it is a huge red flag.
8. Back Channel References
Ask a lot of questions. If you really want to do a full vet, find out who they’ve invested in and do back channel references on them. You’d be surprised, not all VCs have sterling reputations within the community. Conversely, there are a lot of less well-known VCs who are both extremely helpful and have amazing reputations. The only way to find out is by doing back channel references.
9. Find Out if They Want to Learn From You
There should be an obvious pattern. Look at their portfolio and the relationships they’ve maintained with the people they’ve invested in. A good investor is first and foremost a people person — someone with broad knowledge or experience and a thirst to learn through you. A good investor will trade their money and experience in exchange for an opportunity to grow and learn from you.
10. 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.
11. 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.
12. Flip the Script
Ask them how they view your company, what they see your company accomplishing, and their ultimate growth goal with your company. It’s ideal to find an active investor, instead of one who plans to put in some money and leave it at that.
13. 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 getthe skinny about what it’s going to be like for you when you face your most important challenges.
14. 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 bestinvestors. 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.
15. 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.