The Red Case

I recently overheard the directors of a business looking for second round funding – they all agreed that “any money is good money” in today’s market.

I believe they could not have been more wrong!

I don’t know their situation or how desperate they are, but that’s not the point. What I do know is that any company looking for investment needs to be as selective in their approach as the most hard-nosed VC. I accept that it’s a tough market at the moment but the rules have not changed – doing a deal with the “wrong” investment partner will end in tears……every time!

I believe that when you look for investment you need to have clear selection criteria, make sure you know the people sitting opposite you, understand why they are investing in you and be VERY conscious that there are two sides to the discussion (negotiation). If not, this early stage can very easily develop into an “interview” with the person holding the cash in total control – it’s then too easy to be under pressure and take the first offer you get. Having a clear strategy of the “type” of investment you want, asking detailed and direct questions and not being afraid to take time to consider your options (there are always options) are an essential part of the negotiation process. Not only will you know each other’s expectations and avoid future problems, but you will also improve your business case by clearly demonstrating you know what your business needs to be successful.

So what is “good” money?…

I was once told you should look for investors that are “Patient” and “Passionate” and I have added “Proven” and “Participatory” to come up with “The 4 P’s of an Ideal Investor”.

1. Patient - Understanding each other’s expectations is vital – you need to set out your best realistic estimate of time to market and revenue; claiming or agreeing to shorter timelines or unrealistic returns is short-sighted and setting yourself up for failure

2. Passionate - Empathy will make the road ahead far easier – if you can find people who feel passionately about your opportunity and its market, goals and potential is a real bonus.

3. Participatory – More than just a financial relationship – you are asking for investment but a good investor can offer so much more. Access to new markets, partners, skills and general support can be worth almost as much as the cash!. As a side note, if you are paying directors’ fees or “management” charges as part of the investment package,  then they MUST contribute to the day to day activity and add value – apply the same rules to them as to ANY expenditure.

4. Proven – Ideally don’t be the first – in your market space or type of business. Research your potential investors; speak to other companies they work with – find out what they are really like to work with!

As you see I believe the relationship must be about more than just the cash and should include an understanding, passion and contribution. These combined with shared expectations and good communication can only increase the chances of success….for EVERYONE!

I acknowledge this is not a exact science and not every company wants the characteristics outlined above, BUT you should at least ask yourself the questions and be prepared for the process.

Disagree? What do you feel makes an ideal investor?