Good funding partners invest in more than just money. If you’re a founder looking for a funding partner, then things are probably going pretty well in your business. You’re growing at a good rate and seeking to raise capital to ensure that you either keep up this growth rate or better still, are able to accelerate it.
But not all partners are created equal. It is important to know exactly what founders want to get out of the investor-founder relationship AND what the potential investor is seeking from the relationship, and over what timeframe. Read on to find out five key points that you need to consider before diving headfirst into an investor’s pocket.
As all entrepreneurs know, sometimes the biggest hurdle to growing a start-up is just getting your foot in the door, so the value of an investor with great connections in your sector should never be underestimated.
When meeting potential investors, founders shouldn’t be afraid to ask about their relationships with key parts of the value chain or supply chain that will enable future expansion of the business.
Many VCs or family office investors can also introduce founders to future investors for later stage funding rounds. A personal or warm recommendation gives founders an immediate endorsement and boosts credibility. Look ahead and not only at the short-term dollars invested.
Potential to double down in a later funding round
There are a couple of clear benefits in choosing an investor who is able to open up their wallet again in a later funding round.
Capital raising is a time-intensive process requiring extensive time for pitching, preparing presentations and meetings – if the investor already knows you and your business, then they are already on the founder’s journey and have a clear understanding of the business.
If a founder chooses an investor that has the capital to double down at a later stage or lead a subsequent funding round, this can save time and resource in the fundraising process and help attract other investors more efficiently as this sends a strong message to the investor community. Understand the capability and approach of the investor.
Understanding the start-up world
Start-ups are complicated and things don’t always go according to plan, so it’s very crucial to have an investor who understands this and won’t become frustrated when start-ups hit inevitable roadblocks.
Most start-ups aren’t profitable when they are trying to find product market fit, so founders will benefit from a funding partner who has some experience dealing, or ideally running a start-up and doesn’t put undue pressure on the founder to achieve unrealistic targets.
A good partner will not only understand that things don’t always go to plan, but they will have experience adapting similar businesses to overcome challenges and can be a great mentor guiding founders through these difficult times. Find out if your funding partner has been there before.
Not only is understanding the stage of start-ups important, but sector expertise is also crucial! Ideally founders want both of these boxes ticked!
A founder with solid sector expertise will often be able to plug significant gaps in the knowledge of a start-up’s usually small management team. Founders commonly wear many hats so being able to draw on a sector specialist is a real asset until a business is able to hire a person with that skill set.
Part of knowing the sector is the ability to recognise what you aren’t doing, that perhaps your competitors are doing, as well as bringing innovative ideas to facilitate more growth. An appropriate investor is often able to step back and see this with greater clarity.
The right support for the right stage of the business
As a start-up grows the support it needs from the funding partner will change. A very early stage business may benefit from mentoring and coaching or perhaps more technical and sector domain expertise which an investor can offer. As the business grows and the numbers allow recruitment of people in more specialist roles, there will inevitably be less reliance on an investor. The right investor will know when it’s time to take a step back and leave the team to manage the business.
Founders have the power to choose the most suitable investor and competition can be fierce to invest in the most promising businesses. Not all investments are good investments and finding the perfect funding partner can mean the difference between success and failure in the tough world of start-ups. The partnership is a two-way street.
Karth Sree is Chief Investment Officer at HYPER Capital. He has more than 20 years of experience across the investment and accounting industry, having gained his experience in public practice (audit and corporate finance) and privately owned commercial accounting roles. Karth is responsible for developing and directing the investment vision at HYPER Capital, and plays a hands-on role with operational responsibilities for the investment portfolio.