When bringing on an investor to your business, you’re doing more than securing financial assistance. In many ways, you’re bringing on a business partner. To protect their investment and ensure they make a quick return, investors will likely want to have a hand in the business and how it runs.
In the same way you wouldn’t bring on a co-founder without first making sure they were the right person for the job, you’ll want to vet potential investors prior to any sort of agreement. In order to vet them properly, a panel of Young Entrepreneur Council members recommend taking these 10 steps before sealing the deal.
10 Smart Ways to Vet Potential Investors Before Sealing the Deal
- Check their references.
- Look at their past investments.
- Investigate conflicts of interest.
- Understand their goals.
- Determine the value they bring you.
- Analyze their risk aversion.
- Peruse their social media.
- Ask about their biggest failures.
- Look at their personal history.
- Meet more than once.
1. Check Their References
Talk to a founder from one of their portfolio companies. Just like when you’re hiring an employee, if you’re taking on an investor, you need to check their references. If the investor is a good communicator and reliable, the leadership of their portfolio companies will be able to vouch for these essential qualities. — Amine Rahal, IronMonk Solutions
2. Look at Their Past Investments
You must properly vet an investor before agreeing to their terms. You should take a look at their past investments and gauge whether their investment profile aligns with your needs. If there is misalignment, perhaps they are not the ideal partner. Partnering with the right investor can make or break your business, so make sure you tread carefully. — Jack Perkins, CFO Hub
3. Investigate Conflicts of Interest
When doing a deep dive on a potential investor, check to make sure they aren’t currently invested in a project or company that offers something similar to what you do. Some investors will consider that to be a conflict of interest, especially if they’re under the impression that you’re in competition with one of the companies or industries in their portfolio. — Bryce Welker, Real Estate Schooler
4. Understand Their Goals
Understand their goals for the investment. Good investors become strategic partners who can help accelerate the growth of your business, whereas bad investors might push for initiatives that only serve their personal agendas. Try and figure out what their exit timeline and goals are and how they want to achieve those things. Then assess whether or not that aligns with your vision for the business. — Firas Kittaneh, Amerisleep Mattress
5. Determine the Value They Bring You
When vetting a potential investor, you need to understand the value they bring to your business and how they’ll help you. Do they share your mission and values? If not, their involvement could end up being a hindrance instead of helping you grow your company into the best it can be. —Stephanie Wells, Formidable Forms
6. Analyze Their Risk Aversion
Good investors are risk aversive, which is an ability that comes from experience and knowledge. Investors have to understand and efficiently handle the potential risks of investing without turning their backs on you when things go haywire. Analyze their risk aversion ability before sealing a deal. Understanding this helps you enter a strong and secure partnership that’s based on mutual trust and understanding. — Thomas Griffin, OptinMonster
7. Peruse Their Social Media
Check out their social media. You may find many red flags or many positive qualities by doing so. You can learn a lot from their posts and their following. — Morissa Schwartz, Dr. Rissy's Writing & Marketing
8. Ask About Their Biggest Failures
Do not ask only about their achievements, but also about their biggest failures as an investor. Then, do research and compare what they have told you with what you have discovered, so you will see how reliable your potential investor is. Of course, we all try to make the best impression when closing a deal, but remember that honesty is crucial to establish the trust necessary for business. — Kevin Ryan Tao, NeuEve
9. Look at Their Personal History
You don’t want to get involved with a potentially problematic individual who causes media outcries or generates negative attention. Thankfully, a simple Google search can give you a good impression of them and whether they’re known to cause problems. If you find negative press, consider walking away. — Tyler Gallagher, Regal Assets
10. Meet More Than Once
I think it’s a good idea to meet with potential investors several times before you seal the deal. One meeting is suitable for introductions, but it’s not enough time to discuss goals and plan a partnership strategy. I’ve found that meeting with investors three to five times makes it easier for both parties to decide how to proceed with the partnership. — John Brackett, Smash Balloon LLC