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The relationship between founders and their funders is a topic rarely covered, writes Sean Ndiho Obedih.
We usually hear what investors look for in companies, and as a matter of fact every venture capital fund has a thesis of their investment criteria.
But it’s not easy to find material that openly talks about what entrepreneurs should look for in an investor.
Many entrepreneurs looking for funding tend to focus on the capital aspect of the relationship. However, investors stay involved even after the initial capital raised has been spent, and they become a crucial part of the team.
So it is of paramount importance to choose your partners carefully, because this can often make or break a company. There are countless examples of founders who have been kicked out by their investors, and founders suing investors is now an everyday reality.
To counter these phenomena, venture firms are looking at new ways to build trust with founders. In the technology sector, firms such as Sequioa, Andreessen Horrowitz, IntelCapital, First Round Capital and 500 Startups all rely on their track record and brand to attract founders to their portfolio.
Regardless whether you’re seeking startup capital or growth capital, or you plan to approach angel investors, venture capitalists, a corporate investor or private equity firms, here are five key things to look for in an investor:
Deep Knowledge in Your Industry:
A great investor should have deep knowledge of your industry or have access to the top brains in that industry. In order for a company to excel it needs to stay ahead of the competition and this usually depends heavily on the knowledge of the industry trends and how best to execute without making rookie mistakes. A good investor will guide you through this maze and open doors within the industry, whether it’s helping you to secure a good strategic partner or on boarding new clients.
Integrity of the investor matters, especially because it affects the company’s reputation to the market and the public. Nobody wants to take money from a corrupt investor or one that is known for dirty tricks. The best way to find out about an investor’s reputation is to talk to their portfolio companies. Ask them how they have been treated then make your personal judgement as to whether or not to do business with them. Due diligence should not be the reserve of the investors. Entrepreneurs should also carry out detailed due diligence on their prospective investors because it affects who else can do business with your firm.
When it comes to investors, a network is their most important asset. The depth and breadth of the networks vary from investor to investor, but the best investors in the game have the deepest networks. It is through these networks that most deals are done and real partnerships are built because they have already established a trusted group of people that can execute and are results driven. This network also becomes very important when the company gets to the exiting phase
Most entrepreneurs are deeply attached to their products or services. A great investor helps create a good advisory board that gives you constant feedback and can usually bring in a different point of view. This can be the difference between a great product and a mediocre product, which ultimately affects the company’s bottom line. Seeking objectivity is the hardest thing to do, yet is the one of the most important things a founder needs. Great investors always know how to incorporate that in their performance review mechanisms.
Everything But the Money:
When it comes to finding an investor, believe it or not, money isn’t the most important thing. We’ve seen companies raise millions and still go out of business. Great investors believe in your company’s mission and are aligned to your vision. They also become great confidants because they tend to understand the loneliness, and ups and downs of building a company – especially when things aren’t going to plan, or during ‘The Struggle’, as it is known.
I recommend reading Ben Horrowitz’s book called The Hard Things About Hard Things, or watch him explain it here