In the third quarter of 2016, nearly $600 million was invested in 45 digital health startups alone. That’s a lot of dough, but money isn’t the only necessary ingredient when it comes to cooking up a successful startup.
Entrepreneurs from Nigeria to Palo Alto dream of welcoming top angel investors and world-class venture capitalists to their cap tables. But an investor should represent more than an overflowing purse.
What entrepreneurs really need are investors who will be true partners — who’ll contribute a wealth of non-asset value and can fundamentally impact a company’s trajectory.
The search for the right investor, then, should be about much more than dollar signs. Before bringing anyone on board, you need to understand how this person’s skills and resources will align with your company’s goals and vision. So, don’t jump in blind. Recognize that a big check equals a big commitment and that taking money from an investor before thoroughly vetting him or her is like getting married after your first date.
The downsides of not vetting an investor
Startups with great potential can be stalled or sunk by unexpected surprises. If things fall apart, you’ll end up with an expensive legal quarrel that pulls a mountain of skeletons out of the closet. What this means is that if you accept the first investor who comes along, you’ll also likely miss out on engaging one of the secret weapons of any successful tech company: value-added investors.
These experts provide much more than cash. They offer valuable connections and the knowledge to help entrepreneurs navigate obstacles that often overwhelm inexperienced startups.
The high ROI of face time
The best method for sussing out any person’s true nature is talking to his or her friends, family and associates. Investors are no different. Make the effort to meet with investors’ partners, junior associates, analysts and other colleagues. Even a solo angel investor has partners and other connections — so invite them to coffee. Speak with several members of the team to get real insight into what the company is like and whom you’ll be dealing with.
Committing to multiple face-to-face meetings — and the travel this often requires — may seem like a large undertaking, but it will be time well spent: You’ll have a good feel for what a partnership with the investor will bring. Remember, relationships that start as purely transactional will likely remain that way. Reciprocal and rewarding partnerships begin with open communication and trust.
I once asked a potential angel investor to share a time he’d invested in a company that had subsequently failed. He chuckled and responded, “Oh, my investments never…