Business December 24, 2019 Last updated December 24th, 2019 1,649 Reads share

How to Evaluate Potential Investors

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Investors are the lifeblood of so many small businesses. While many business owners looking for funding often focus on how they can attract the right investors, it’s equally important that these business owners properly vet each potential investor to determine if they’re the right fit for the company. The type of investor you choose to help build your company can spell success for the future or can lead to the end of your business. The following information details some steps to take to properly analyze potential investors:

  1. Consider the Best Type of Investor for Your Current Stage

    The rules for finding and vetting an investor typically change based on various stages of business and rounds of funding. At this time, it’s imperative to search for an investor that will be able to support you during this current stage in your business. While many business owners clamor at the idea of getting a big check from a VC, not every business is in the proper stage to attract a VC investor. Businesses that are still early on in their development may need to hold funding rounds with friends and family members or angel investors before seeking out the likes of a VC investor. 

  2. Analyze an Investor’s Ability to Fund Your Business

    It’s no secret that raising money is likely one of the most challenging responsibilities business owners face. Don’t make this process more challenging than it needs to be by spending your time looking into investors that don’t have the resources or ability to support your endeavors. Make sure every investor you’re interested in meets your requirements by determining their ability to fund your business.

    Financial institutitons of all kinds will have a wealth of information available online for those interested in their services. Make an effort to answer some of the following questions before getting in touch with an investor:

    When did they last fund something? How are each investors’ other investments performing? How strong are these investors financially? What funds does the investor have available to contribute to supporting new businesses?

    Ideally, the right investors will have a history of successful projects that allow them to keep contributing to other companies as they see fit. While some small businesses seem to be desperately searching for funding, don’t make the mistake of working with the wrong investor. Being the investor’s only profitable investment isn’t beneficial for your company. Move on to investors that are financially stable and have a history of successfully investing that they can use to contribute to the success of your company. 

  3. Determine an Investor’s Reputation for Funding Multiple Rounds of Investment

    The process of searching for investors for every round of funding is time-consuming and complicated. Whatever investor you choose to work with will affect your business ownership, potentially making your company less alluring to other future investors. As you continue researching potential investors, make it a point to discover whether or not they have a reputation for funding multiple rounds. This way, you’ll have less of an issue connecting with investors at each stage, as you will continue to work with the same investor. 

  4. Research the Investors’ Level of Portfolio Diversification

    Another detail to consider in your search for investors is the level of diversification of their portfolios. Investors with diverse portfolios will offer business owners the most benefits when it comes to access, influence and reach. This type of diversification is a preventative measure to ensure their portfolios aren’t all comprised of the same investments and has the added benefit of developing a broad network of connections.

    This way, as the market and their investments change, they’ll still be able to contribute to your company as each investor isn’t relying on a single form of investment for their earnings. Taking this precaution will help you to better forecast the future and safeguard the finances of your company. 

  5. Determine an Investor’s Interest in Lead Investing

    Lead investors can set the tone for future funding for business owners. These lead investors often establish financing terms for other investors. Additionally, lead investors often finance a substantial amount of the total business owners are hoping to raise.

    As they are the first of the investors to invest in your company, your lead investor will encourage every other investor to follow suit with their own funding. This way, you’ll be able to locate other investors more easily after first pinpointing your lead investor. 

  6. Analyze an Investor’s Ability to Influence Others

    Influence is a major part of the business world and is just as important when you’re seeking the right person to meet your fundraising needs. During the research phase, determine how much influence the investor has in your industry, as well as the level of influence they have with other investors, media channels, and other influencers. This type of influence is often comparable to the amount of funding they’re able to provide. 

    Like in this example about Fisher Investments, CrunchBase can be a valuable resource for determining key details of a financial institution including key players in the organization, affiliated companies, state of domicile, previous acquisitions, and even whether or not the organization offers the desired type of funding in the first place. A look at the CrunchBase profile of Fisher Investments would be enough to see they do not participate in VC funding, for example.

  7. See If Each Investor Fits in with Your Brand

    As you continue your research into investors, be sure to determine whether or not they are a good fit for your brand. While some business owners often prioritize their financial needs, it is essential that you don’t place these needs above your brand’s reputation and company values.

    Business owners must remember that investors do more than bankroll their business ideas. Your investors will likely be on your business’ board and will have a say in your office- and brand-related decisions. If your investor of choice isn’t the right fit for your brand, this can wreak havoc on your company in the long run.

    In many ways, the investors you choose will become the face of your brand. The right people will encourage others to get on board simply because they recognize and respect your chosen investors. Keep this factor in mind when deciding which investors to bring onto your team.

    Choosing investors for your business is a long and complex process. Make sure the right people are investing in your company by taking the time to do the necessary research. Use this guide during your investor-vetting process as you analyze what people are the best fit for your business.