The ideal situation for any start-up business that requires investment is working with an investor who not only has the necessary funds to back the idea, but also has invaluable experience and expertise in the sector. This is win-win for an entrepreneur as they will be able to grow their business and benefit from a bulging book of useful contacts that can really open some doors.
But for many entrepreneurs, working with an investor can be some way from this dream scenario. The reality is that many investors do not want to interact with their investments on a day-to-day basis. Most are very busy already and simply want to be updated every so often about the progress of the business.
So what should you expect when working with an investor? Let’s take a look…
1. Don’t expect too much
Most investors are not looking to take on any extra work. The norm in the investment world is for investors to take a back seat and let you run the business, which can be a good thing. You should not take it personally if an investor does not wish to interact with you all that much. Just take your confidence from the fact that they chose to invest in your business in the first place. Most investors will be happy with the occasional progress update and a copy of the annual accounts.
2. Ask for help if you need it
If you’re lucky enough to work with an investor who’s accessible and happy to provide assistance and advice then make sure you ask for help when you need it. Whether you have a specific request or need guidance in a particular area, investors that have made themselves available will usually respond well when asked for help.
3. See if you can attract an investor director
When a group of angel investors forms a syndicate, they may nominate an investor director to represent their interests. An investor director will usually be an investor who has the largest minority shareholding or has particular expertise as an investor or in the specific sector.
The benefit of securing an investor director is that this more formal role is likely to bring a commitment to helping the business. The investor director’s duty is to protect the interests of their fellow investors. The best way to do that is by making your company a success. For that reason, some investor directors may be quite demanding, but they will also be supportive and provide assistance when it’s needed.
4. Don’t necessarily refuse to pay a fee
Entrepreneurs would be right to be wary of investors who ask for a fee, but they should not necessarily dismiss it out of hand. Some investors ask for a small annual fee simply because a transaction can create a contract and set out clear expectations that allow both parties to be held to account.
However, there may also be some investors that demand a paid non-executive seat simply because they want to make a quick buck. You must judge everyone on their merits, but be wary of investors asking for a fee when they’re only making a small investment. Any fees you do pay should always be small.
5. Perform due diligence on prospective investors
Choosing an investor is one of the most important business decisions you will make, so take the time to think about exactly what you want the investor to bring. Do you want an investor who is hands on or has particular expertise? Perhaps you need someone with contacts in the industry? This is all part of the conversation you should have with potential investors.
Once you find an investor that’s a good fit for your business, make sure you do a few background checks. Contact businesses the investor has worked with in the past and see what kind of approach they take. Also, check they have a track record of success investing in start-ups in your sector.
6. Formalise the agreement
It’s easy for an investor to promise the world when you’re desperately searching for funding, but can you be sure they’ll add the value they say they will? For example, an investor might offer to open certain doors, but may not release this promise once the deal has been done. For this reason, it’s easier to agree and formalise expectations as much as possible before completing the deal. A transaction, like the investment fee above, could be one way of creating a transparent commitment from both sides.
7. Never take them for granted!
Your relationship with your investor will be one of the most important parts of your business, so always give them the respect they deserve and never take their time or money for granted.
How can we help?
Prosper provides a comprehensive approach to accountancy, tax & business growth services for start-ups across the UK. We are your bookkeeper, accountant and finance director all rolled into one. Check out prosper.accountant to learn more about how we can help your business