In the stress of searching for expansion capital, it can be easy to forget that the right investor can add more than money to a company’s resources. Successful investors with good reputations and broad-ranging contacts can help in many ways. As directors and counselors, their experience can help management avoid costly mistakes. They can help direct management develop useful metrics for measuring and directing company activity. Their knowledge of industry practice and the activities of competitors can give management a fresh perspective on their business. Their good reputations and finance industry contacts can make future fundraising easier and less costly. Contacts they have can help management find qualified executives to fill important functions.
While management’s first objective in a fundraise is to obtain capital on favorable terms at the least cost to the company, a strong investor’s other contributions can, in the long run, have much more to do with the company’s ultimate success than the money they provide in first investment. But how does management know, in advance, that a given investor can or will provide meaningful non-financial value to their company? There can be no guarantees, but inquiries into the following matters during the fundraising process can help management know more about what type of investor they are getting.
Success attracts money and good people. It usually follows from good decisions and successful implementation. The more successful your investor has been, the more helpful he is likely to be to the company. In gauging this factor, managements should include discussions with managers of the investor’s other investments, past and present, and inquire to what degree their goals and aspirations were met. Investor and management goals are not always the same.
Is the investor active in the company’s industry? If he is and his reputation is solid, his contacts can help management identify and attract important management members to strengthen its team. Investor knowledge about the industry can supplement management’s background, providing more experience for critical company decisions.
Direct conversation with managers of other companies the investor has been involved with is the best way to determine whether the investor will be helpful or distracting. Any investor should be willing to provide management with a list of companies in which it has invested. Appropriate questions include whether the investor supported the company through difficult times, whether he made constructive contributions as a board member, and whether he was helpful in identifying and attracting investors to later investment rounds.
Not all investors have the capability or interest in investing in later rounds of company financings. Those that do can make it easier to raise money by committing to provide part of the funding on terms negotiated by new investors when the fundraising process begins. Questions about an investor’s ability, willingness, and history of investing in later rounds of other companies can help management determine whether they have identified an investor who will invest in their subsequent financings.
Is the investor known as a player in the national or regional venture capital industry? Is the investor respected in the investment banking community? Have they backed companies who have conducted successful public offerings or sales at attractive values? The answers to these questions will help management evaluate the degree to which their investor may be able to assist the company in attracting later investment or a quality investment banker to assist in its sale or public offering.