Covid-19 has the start-up community in a frenzy. Funding rounds plummeted by 22% in March, valuations are dropping and founders are worried they won’t be able to raise their next round. The perpetuation of this narrative and ensuing panic of securing investment in these uncertain times may lead to rash decisions and regrettable partnerships as early stage companies pursue angel investors and VCs.
However, the current chaos of securing investment should not outweigh appropriate and thorough due diligence. It is well known that divorcing your wife or husband is much easier than divorcing your investor. Just as you wouldn’t rush into a marriage, so too should finding the right investor take time and careful consideration. So how do you know if you’ve found The One? Well, various important factors need to be considered before you get down on one knee.
Whilst many investors are good news, many also are not. Investors with poor reputations can have a knock-on effect on portfolio companies’ credibility and their ability to raise capital in the future. Repeated poor investments or, more seriously, illicit funding and criminal activity are all huge red flags — appropriate due diligence would be essential. Globacap offers regtech tools for KYC (know your customer) checks — e.g. screening adverse media or regulatory watchlists — which you can repurpose to look at your investors. The reputation of your board members will provide a great degree of credibility towards your venture — if you want to move onwards and upwards, appropriate reputational due diligence must be carried out.
Start-ups are on a bumpy enough journey as it is — you don’t want to waste time with investors who are wasting yours when it comes to funding. Important questions should be addressed upfront about their ability to fund — when was the last time the prospective investor funded something? How is their portfolio performing? How strong are they financially? This should give you a good indication of their financial position. Better still — a strong financial position and a reputation for repeat funding. It is a sought after, attractive trait — finding new investors at every round is expensive and time consuming. It also dilutes your ownership, and can make your company less attractive to others in the future. Find investors who are already in the habit of participating in future funding rounds and cut down on these issues. To track funds activity you can use Crunchbase.
Investors with extensive networks can help both of you get a positive return from the investment. A study from the Sloan School of Management found it is not only the number of contacts that a person has but also the closeness of those contacts that will result in increase in revenue and completed projects for a business. For example, some of the top tier early stage VC investors like Seedcamp or Balderton are hugely influential in the venture space. If they invest in your company they could also support you with resources around HR, marketing, subsequent financing rounds, etc. That type of value is something to look for during your capital raising efforts.
You have to be clear that you are both reading from the same page. You have to share a similar drive, belief and passion for the business. Do they believe in your business plan? Will they let you control the decision making and trust your direction? Or will they sabotage you and your reputation, and look for reasons to push you out of your own venture? Let’s hope not the latter — but a deep dive into their intentions prior to the entering into a partnership is always best.
The right fit?
It seems straight forward but often overlooked. It is important to get a good flavour of what your investors are really like, whether you will get along with them and if they are the right fit for your brand and culture. The co-founders of the largest global podcast community, Acast, recommend meeting with start-ups who have already received funding from the investor. Human sources will normally be far more revealing than published information in this respect.
It’s not all doom and gloom — it is still possible to fundraise successfully and the current situation will eventually pass. Don’t let the panic of covid-19 cloud your better judgement — appropriate and thorough due diligence will lead to the best decision and — hopefully — a long and fruitful partnership.