You’re an entrepreneur. Poised. Confident. And your idea is going to change the world we live in. That’s half the battle.
The other, and perhaps more pressing, half is the need for money. It’s a necessary evil. Luckily, your available options are more numerous than ever before. You could go the crowdfunding route, utilizing services like Kickstarter or CircleUp. This method has proven itself very effective for (generally) smaller projects and ideas.
But if your idea is big, bold, and daring, you’re probably going to need investors. Whether you’re dealing with an angel investor or a venture capitalist firm, you shouldn’t just go in blindly and accept whatever money is offered. You, my entrepreneurial friend, need to do your due diligence. Fail at that, and you’re in dangerous water.
What is an Angel Investor?
An angel investor is usually a wealthy individual looking to invest in start-ups and projects. They generally offer amounts smaller than venture capital firms, but they also may require fewer details and answers about your business. They are not ignorant, but they are often willing to overlook certain shortcomings or deficiencies in your plan if they believe in your idea. In recent years, angel investors have started banding together into groups and networks. And be aware that angel investors in the USA (and elsewhere) must be accredited investors according to SEC regulations.
What is a Venture Capitalist?
Now you’re playing with the big kids. Venture Capitalists are either incredibly wealthy individuals or firms responsible for millions and millions (if not billions) of dollars. They typically invest in business start-ups and expansion, but their higher monetary investment means that they require concrete answers, +5-year plans, and often some sort of say and/or ownership in the idea. They are involved, and expect an excellent return on investment.
Whether you go with an angel investor(s) or venture capitalist, you need to choose carefully. Make a bad choice, and it could lead to disaster, financial ruin, and heartache. So, how do you help make the best possible decision?
Here are the steps and questions you should ask to properly vet your potential investor. It’s not just you trying to impress them. They need to demonstrate to you that they are the right fit, too.
Check with National Registries
There are numerous associations and organizations around the world that register, monitor, and often regulate investors. Look into them. In the USA, there is the National Venture Capital Association and Angel Capital Association. In the United Kingdom, there’s the British Private Equity and Venture Capital Association. A quick Google will uncover any existing organizations in your corner of the globe.
Before going with an investor, check on them. Do they belong to the national association or organization? Are they a member in good standing? Read their profile. Look at return on past investments. Are they legally recognized?
Are They an Accredited Investor?
Many countries lay out specific requirements in order to accredit someone an investor. Do your potential investors meet all necessary requirements? If not, you could be in violation of the law.
Do Your Research
Likewise, a simple Google search should turn up a wealth of information. Has anyone had a bad experience with them? Did they receive any bad press in the past few years? Have they done well with their investment choices? Have they committed any fraud or gotten into any legal trouble in the past? Make sure you can answer these questions, and in the internet age, there’s no excuse not to do some thorough research.
Meet With Them. Ask Questions.
Obviously, you’re going to sit down (or pitch) with potential investors. They will have questions for you, and you’d better be able to answer them if you want their money. Likewise, you should have questions for them. Ask about their expectations. Are they reasonable? Ask about their anticipated level of involvement. Are they asking for you to relinquish too much control or ownership? If you’re uncomfortable with any of their answers, it’s not a good fit. Don’t be caught by surprise down the road because you couldn’t be bothered to ask questions. Too many entrepreneurs lose sight of this in the early days the moment someone waves a bag of cash in front of them.
Trust Your Gut
Beyond the questions you must ask, you should also trust your instinct. If their give great answers, and promise minimal involvement but high investment, but it feels “wrong”, there’s probably a reason for that. Are they too eager to invest, not caring much about your business plan or competition? That should be a red flag. If you don’t feel comfortable with them - even if you can’t place your finger on why - you’d do well to heed that warning.
Talk to other entrepreneurs out there. Get their advice. What, if anything, have they heard or experienced? Use their insight in your search for solid, reliable investors.
There are many options out there for the aspiring entrepreneur. Don’t rush in and accept the first offer you get. Do some research. Do some checking. Your future success depends on it.
Photo by Tim Dorr
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