by Tom Britton, co-founder & CTO at SyndicateRoom.com
Your first investors can be your most valuable assets so when looking to raise finance you should always look beyond the capital to what else the angel can bring to your business. For that reason you should do due diligence on all potential investors before pitching, and then pay careful attention to the questions they ask after you’ve made your pitch.
Below is some guidance on what to look for in a potential investor:
1. Industry knowledge/experience.
The best investor you can have is one that has specific experience within your industry. One who gets what you do and the environment in which you are operating. They’ve been there, they’ve done that, they know the pitfalls to avoid and how best to capitalise on what you are building. There’s a reason why Nesta reports that angels who invest in industries they know are more likely to make returns on their investment. Keep that in mind when you select your first investors.
2. Early stage investing experience.
Look for investors who have either been entrepreneurs themselves or have invested in early stage companies that have gone on to be successful. If they’ve built a company that has successfully exited, or if they’ve invested in a company that has, they will know what it takes and can help you through the process.
Regarding first time investors, while the excitement around making their first investments can be contagious, don’t let this block out any concerns you may have about their ability to help you deliver.
3. The questions they ask.
You can judge many things about a potential investor by the depth of their questions. How much experience they have as an investor, their experience / knowledge about your sector, and how interested they are in what you are pitching.
An experienced investor with good knowledge about your industry will not ask the basics (how big is the market, etc.) but will deep dive into specific aspects of your product, they will ask detailed questions about your business plans and how you will approach your target market, they may even mention potential competitors by name and how you plan to tackle them as competition.
Avoid investors who don’t really go into the details and only focus on tax breaks. They might end up investing as a result of the tax breaks but will not contribute beyond the capital.
4. The size of their networks.
No, not their social network, their investment network and their network of business contacts.
A good business angel will generally invest with a group of other investors and, while they may not have the same specific industry experience, they do offer additional sources of capital which can come in handy particularly in later rounds.
In addition to their investment network, a good angel will have a strong business network and will be able to open doors for you to suppliers, distributors, and hopefully customers. While you should never abuse the privilege, it’s in the angel’s interest to introduce you to all of the above. The better you do the more they receive in return on their investment.
5. Would you mind having them as your boss.
Particularly in the early stages of your relationship with your investors you will need to be comfortable working with them on a fairly regular basis and knowing how to manage their expectations and their opinions about how things should be done. While the ultimate say comes down to you as the founder, there will be certain situations where your investors experience will be far greater than your own and you’ll need to let them call the shots (behind the scenes). This is often difficult for founders, particularly first time entrepreneurs who are used to making all decisions. The test for this is to ask yourself when speaking to potential investors if you would be happy working for them if they were the ones running the business. If you wouldn’t be comfortable with that, then they may not be the investor for you.
Hopefully in following the guidelines above you’ll bring the best-suited investors on board but, when it comes down it, go with your gut.
Tom Britton is co-founder and CTO at SyndicateRoom.com. Tom completed his MBA at Cambridge where he focused on developing start-ups and now Tom is fully committed to helping start-ups raise capital through equity crowdfunding while giving investors the opportunity to invest alongside experienced Business Angels.