A number of 1st time entrepreneurs have come to me recently asking for advice on choosing their investors.
Here’s my quick and dirty guide to choosing your investors:
- Choose investors you want to work with. From my experience this is much more important than choosing based on valuation. Trust me, once you are within a few percentage points on the valuation, you will do better to choose the person you are most excited about rolling up the sleeves with than the person who puts forth the best offer. In the long run having the right person around the board room table is much more valuable then a few percentage points of the company. I know, this might not seem obvious when you think you are about to build the next $billion company, but when times are tough — and they likely will be someday — having the right people around the table matters most. I encourage you to do the “would I enjoy dinner” test. Ask yourself if you would enjoy spending 3 hours with the person at a one on one dinner. If no, move on. Then, do the “once a week” test. Ask yourself if you would enjoy talking with the person once per week for 30 minutes and consider it an opportunity, not a chore. If no, move on.
- Related, choose investors you admire. Your investor should be a role model. They should have had some experience that you particularly appreciate and respect them for. You should respect their previous investment decisions. If not, move on.
- Choose investors who are investing in you. Make sure they believe in your ability to build a valuable company and create a return on their investment. Make sure they are not seeing this just as an investment in a business or a product, rather an investment in the people who are running it. This is critical if you are ever going to change your strategy, pivot your business, take on new lines of business, or consider other tough decisions outside the scope of the initial investment thesis.
- Choose investors who agree with your long term plan for value creation and exit strategy. You don’t need to know your exact exit path going in, but you should know what your goals are and make sure your investors are aligned with those goals. It doesn’t make sense to bring in investors who expect you to build a $1B business when you’re intent on selling for $100M. Remember, a VC expects a minimum 10x return on investment. Are you prepared for that?
- Choose investors who get your industry and who really believe in your strategy. It’s not fun to convince an investor after the fact. They need to believe in the opportunity and your plan before they invest.
- Choose investors who provide value-add with every interaction. I had a call with a potential investor today for example who gave me 4 truly valuable market insights and 2 awesome competitive tips to look at in a 20 minute call. That’s awesome. Be weary of a potential investor who doesn’t add much to your own team’s thinking.
- Choose investors with a big rolodex. Often times the best thing an investor can do for you after their initial investment is open another door.
- Choose investors who aren’t too busy to help. Stay away from investors who are hard to pin down on schedule during the investment phase. They are less likely to be there when you need them down the road.
- Get references. Talk to the CEO’s your potential investors have previously invested in. Drill in to get the real scoop. Make sure to talk to a few CEO’s of companies that made it and a few that didn’t.
- Look for investors who have backed the same entrepreneur multiple times. You want that sort of loyalty behind you.
I hope this helps.
What other tips do you have from your experiences?
This post is being discussed on Hacker News.
In my next post I’ll provide my tips and learnings around How to Manage Your Board of Directors.