More Than Money: The Benefits an Investor Brings to Your Business
By Margot Carmichael Lester, Staples® Contributing Writer
If you watch enough Shark Tank episodes, you know that there’s more to a good deal than cash and terms. Many times, the deciding factor is something else — access to customers or manufacturing partners, expertise in a niche market, connections to other experts and sources of capital — even compatible personalities.
“It’s really important to look at the whole package,” says Jan Davis, president of Triangle Angel Partners, an investment group in the Research Triangle area of North Carolina. “Money, terms, connections, expertise, brand — those factors all matter. If you’re stuck on just one thing, like pre-money valuation or terms, and ignore other issues, you’re likely to be sorry later.”
Just as investors evaluate you and your venture, you should evaluate investors and their offerings. Here’s what to look for:
1. Expertise. “Nothing accelerates like experience,” proclaims Mike Finger, executive director of the Innovation Foundation of Western Wisconsin in Eau Claire. “If you can learn from someone else’s mistakes and avoid those costs for your business, you have exponentially improved your chances for success.” Davis agrees: “There are some things that just take time, and experience is one of them. If you can find someone who’s been down a similar path, done a start-up and made a successful exit, they can provide valuable advice and counsel.” For Bobby and Judy Edwards, closing a deal with Shark Lori Greiner gave them expertise they didn’t have to grow their Squatty Potty family business. “It really is valuable having someone with that knowledge and that experience — in particular in negotiating contracts and projecting sales and projecting inventory, those kinds of things,” Bobby says. “It’s nice having someone with that kind of experience on your team.”
2. Brand/reputation. All things being equal, choose the investor with the best reputation. “If you’ve gotten money from a local person who everyone knows, that helps,” Davis says, “because you can know or easily find out if they are viewed as a smart investor, a successful picker of winners.” But if you don’t know, ask around. What do people in the know think about your prospective investor and why? An investor’s reputation in the industry is a good indicator of how effective he or she is as an enterprise builder and how many doors he or she can open for you.
3. Connections and introductions. “Connections are golden,” Finger says. “The investor should be able to put you in touch with people who can accelerate your business. The right connections can dramatically impact your chances of success.” Evaluate investors’ networks — easily checked on LinkedIn — and make sure they can put you together with vendors, suppliers, manufacturers, consultants or service providers who fill skills and talent gaps, or who can otherwise help grow your business. For instance, before partnering with Greiner, the Squatty Potty team struggled to increase sales through the retail store channel. “Retail had been really elusive to us,” Bobby says. “So partnering with Lori in particular was really valuable. She has more retail experience than any of the other Sharks; more of her products are on retail shelves. Since partnering with her, it has been easier to get the phone calls answered; the store buyers are more interested.”
4. Compatibility. You spend a lot of time and make a lot of decisions with your investors, so it’s crucial you two are on the same page. “I think you really have to evaluate your goals and the goals of the people you're looking to have as an investor,” explains Greiner. “Do their goals match yours? What's their personality? Are they someone you want to work with? But also, what would it be like if things weren't going well? Are they someone you want to be answering to and spending long days with when the pressure is on?”
Investing time and effort in vetting your potential financiers yields better ROI for everyone, says Austin, TX–based venture capitalist Mansoor Ghori, managing director at Petros Partners.
“If one investor has one or more of the above than the other investor, it may make a lot of sense to go with them” even if terms are less favorable, he says. “There is an old saying: ‘It is better to have a smaller piece of a big company than it is to have a large piece of a much smaller, or in the worst case, no company.’”
“Every little edge counts in the start-up game,” Ghori continues. “Investor brand, contacts, industry knowledge and experience are crucial to helping your company achieve success. Eighty percent or more of start-ups fail, so the more help you have, the higher your likelihood of success.”
Watch Shark Tank Fridays 9|8c on ABC.