Steps to Choosing a Good Investor
Seeking an investor? Take these five steps to protect
your company from making a bad choice.
1. Know the investor's personality. Different
kinds of investors have different reasons to invest. To
glean personality clues, listen to the questions investors
ask. An obsession with operational detail is often a sign
an investor will want to take part in day-to-day company
management. If you need additional management help, that
may be to your advantage. But it can easily turn into
a case of too many chefs spoiling the stew.
2. Do background research. Internet-based reference
search companies, such as ChoicePointOnline.com, LocatePLUS.com
Inc. and USSEARCH.com Inc., provide quick and easy ways
to know if your investor has any skeletons in the closet.
Reference search services access databases of business
licenses, criminal records, bankruptcies, real property
transactions, civil court judgments, even utility bills.
A basic search through such a system costs $8 on average.
Within the search results, look for inconsistencies. The
absence of data may be more important than the information
itself. If very little is available on a person, it could
be that they pay cash for everything-or it could be more
insidious, like their whole personality is fabricated.
Likewise, multiple occurrences of different names, or
different spellings of the same name, may indicate previous
fraud. Also, avoid people involved in multiple lawsuits.
3. Get help. Get an outsider or a consultant to
look over the deal. A consultant has no stake in the deal
and can operate at a level above any particular self-interest.
If you cannot afford a paid consultant, look within your
own network for a person whose judgment you trust.
4. Set expectations. Perhaps the most overlooked
aspect of taking on an investor is setting expectations.
Even when a formal contract or subscription agreement
exists, it rarely addresses issues like mentoring and
management. Do you expect your investor to help manage
the business or to keep his distance? Let him know in
5. Tackle problems quickly. At the first sign
of things going bad between you and the investor, begin
a clear and professional dialog. If you explain to an
investor that his actions are counterproductive, you may
not only change his behavior but also win his respect.
If you are less fortunate, you will end up with an angry
investor-but you may save the company.