First blog in a series by Joy Lindsay, Managing Partner, Sofia Fund. View Blog II here and Blog III here.
Follow the money, but find the fit. It’s advice I’ve been giving to entrepreneurs for more than 20 years.
The right investor can offer so much more to an entrepreneur and her business than simply cash. While cash continues to be king, and is likely the primary reason for the relationship in the first place, additional value can come in many forms if you look beyond these three common investor scenarios:
- Entrepreneurs who pick investors simply because they have money to spend, without knowing if the investor is capable of adding more value to the relationship. It may even be someone who is willing to invest without doing due diligence or invest at a high valuation. You think it’s a “good deal” for your company until you try to raise your next round.
- Entrepreneurs who turn to crowdsourcing because they want only passive investors who won’t meddle in the business only to find out the cap table is out of control and it’s a nightmare just to keep track of investors much less get them to approve any transaction.
- Entrepreneurs who only want investment from the top tier or most active venture capital fund, without realizing the investor may make decisions, with or without you, (including replacing you as the CEO) or may not have the time, interest or expertise to understand what you do and provide what you need for your business to grow.
Before you enter into one of these situations, consider conducting as much due diligence on the investor as the investor conducts on you, starting with an assessment of the investor’s business experience.
Business experience
Among investors, angel investors likely have the most experience as successful entrepreneurs in their own right. According to the publication The American Angel, 55 percent of angels were previously founders or CEOs of one or more of their own start-up companies. They are investors because they are big believers (and achievers) in the start-up community.
They’ve walked in your shoes, which makes them excellent role models, cheerleaders, mentors and coaches. They understand what you are going through and can provide ongoing counsel on a variety of opportunities and decisions you will face – from the basics, like choosing a payroll system, to the biggies, like how to balance work and life.
Other angel investors have been business executives at large companies, and have experience in planning strategy, developing partnerships and managing operations at the enterprise or business unit level. They’ve prepared budgets, designed compensation plans, managed product development and hired (and fired) many people – all responsibilities you now have as the founder/leader of a company.
If you choose an angel investor with deep expertise in the industry in which you do business, there’s even more value to gain as you learn about the players in your market and how companies think about acquisitions – possibly even of your company down the line.
At Sofia Fund, we are proud to have managing partners who have built, financed, advised and guided companies of significance. We know how difficult it is to be an early stage high-growth company, having been entrepreneurs ourselves. We have diverse operational backgrounds in a broad range of industries. We’ve been on both sides of the table – raising money for and investing in startups. In addition to running businesses and managing large corporate divisions, we’ve been advisors and board members of numerous successful companies, often helping them with follow-on funding and a successful exit. Because we believe diverse experiences and opinions lead to better results, all Sofia Fund managing partners are involved in the Fund’s investment decisions. Together, we select companies to invest in based, in part, on our ability to add value beyond our financial resources. We want to use our collective years of business experience to the advantage of our portfolio companies and we look for management teams who want investors as partners. We invest in entrepreneurs who are just as choosy in their selection of an investor as we are with our investments.
As you move forward in funding your business, take the time to find investors who are able and willing to add value far beyond capital. They are out there and you can find them if you know what to look for, starting with business experience. Watch for two more of my upcoming blogs in this series, focused on choosing investors with smart capital and financing strategies and large, relevant networks they’re ready to leverage for you.
Joy Lindsay is a managing partner at Sofia Fund. Joy’s business experience includes her years as senior vice president in the Westlaw division of West Publishing (now Thomson Reuters).