Searching for investors in your startup is the Holy Grail for entrepreneurs, who sometimes spend more time seeking funding than building their actual business and creating the great ideas, products and services behind it. After all, “It takes money to make money,” right?
Wrong—at least when that money is the wrong money.
Soon after I founded Geneca, we raised only $394,000 in capital from friends and family. While that may sound like a lot of cash in the tech startup world, it definitely is not. We didn’t have “real” business investors who put in “real” amounts of money. And that was on purpose.
The importance in choosing the right business investors
Why? Because you don’t want the wrong—for you—kinds of investors, or their cash.
Your startup is your baby. It’s a part of you. As such, you should make sure your investor—and your ultimate goals—are compatible, because…
1. The wrong ones skew your success horizon.
Some business investors think in the short-term, aiming for a quick return on their investment, one with a return as immediate and as large as possible.
Think about what happens when a company goes public. From that moment on, the company is evaluated in terms of quarterly earnings and market cap. Meeting earnings projections and investor expectations in each cycle is all-important.
So what if you develop a great idea that requires significant investment over the next three quarters but that will, three years from now, allow your business to make twice as much money? You won’t be able to implement that idea because the system you’ve created by choosing short-term focused investors won’t let you.
If, out of desperation (or a lack of foresight), you take on investors totally focused on short-term return, even though your focus is on long-term growth, know that you will constantly butt heads because your goals will never align.
2. The wrong business investors demand the wrong level of involvement.
Of course, anyone willing to write a check automatically earns the right to have their say, and maybe plenty of input is what you want. Maybe, along with capital, you want to constantly tap the experience, wisdom and connections of your investors.
But one of the reasons entrepreneurs start a company is to make their own decisions and chart their own course. Most don’t want that level of involvement. Most hope for relatively limited input from their business investors.
If you want lots of involvement, great—seek investors who want to be heavily involved. If you don’t, make sure you seek investors willing to take a backseat and let you do the driving. Because if your goals and expectations aren’t totally aligned, the relationship will sour—and eventually so will your business.
3. The wrong ones seek the wrong long-term outcome.
Maybe you just want to build a company to a certain size and then sell it. Many business investors seek that goal, too, because their ownership stake can instantly be converted into a cash return.
But cashing out might not be your goal. It certainly wasn’t my goal. Maybe you want to build a profitable, sustainable company that your clients value and your employees love to work for. If that’s what you want, you need your investors to embrace it, too. Like you, they need to be in it for the long haul.
Don’t make the easy, expedient choice where investors are concerned. And definitely don’t make a choice out of desperation. Be smart. Know what you want. And know what they want.
This article was published in January 2015 and has been updated. Photo by Shift Drive/Shutterstock
