Most startup founders say they want smart, value-added money. At the end of the day, though, they primarily just want money. That doesn't mean that all money is equal. A good investor can add value while a bad one can destroy it.
Here are some of the things to look out for.
What separates a good investor from a bad one?
Typical qualities of a good investor:
A good investor can:
- Provide advice on funding rounds (timing, size, etc).
- Make introductions to potential investors/clients/partners/hires/acquirers.
- Provide an investor's view on market dynamics, and whether you should conserve cash or go for growth (quite relevant at the time of writing).
- Help you understand what investment terms to accept versus what to push back on.
- Provide a sounding board on difficult issues like:
- Cofounder disagreements.
- Difficult investors.
- Your mental health (solo founders generally have very few people, or perhaps nobody, who understands what they're going through).
- If and when to give up.
Typical qualities of a bad investor:
A bad investor may:
- Tell you how to run your business.
- Don't care about people, only returns.
- Are happy to benefit at your/other investors' expense.
- Push for growth even if it's not the right percentage play.
- Get stuck in the detail.
- Take up too much of your time.
As the smart people at Reflect Ventures noted, if an investor tells you how to run your business then either:
a) They're a bad investor because they are trying to do your job for you, usually with a lot less knowledge of the problem you're solving; or
b) They are a bad investor because they invested in a bad founder, and are now trying to save their investment by interfering.
Does it matter, as long as I raise the money?
Actually, your primary job as founder is to ensure your company doesn't run out of runway, so getting the money has to be your top priority. Nevertheless, good investors are way better than bad investors.
It's common for investors to do due diligence on the companies they invest in, but it's a lot less common for founders to look into their investors. This isn't a great policy.
If you can, speak to one or two other founders that your investor has backed. This should give you some insight into what they're like to work with. Of course, don't forget that the investor is likely to refer you to the who like them the most, so be prepared to look people up yourself.
As I said, at the end of the day, these are nice-to-haves. The key value that investors bring is the money. That's what keeps the lights on. Generally speaking you should always take the money, no matter who offers it, unless you're certain you can find the money elsewhere
3 things to remember when raising money.
- Make sure you understand all the terms. That's ALWAYS worth investing time and/or money in.
- Most investors have made multiple investments so they can afford failure more readily than you can. Remember your interests may not always be aligned.
- Investors may like you, but they invested in your company, not in you. If push comes to shove, their allegiance will be to their investment. If your investor feels that you are the problem, they will want to fire you, and you may be more expendable than you think.