In building you company properly and finding the right partner and investment, it is imperative to understand the relationship dynamics with a potential partner
Last post was only a prelude to truly understanding the research and skills needed to find the right investing partner. In building you company properly and finding the right partner and investment, it is imperative to understand the relationship dynamics with a potential partner, not only because the right homework will save you lots of time, but also because you will find yourself less frustrated.
As young entrepreneurs we often go to numerous meetings and hear many opinions about our product and business. It is our job to filter out the irrelevant feedback and to absorb and process the right ones. This is not an easy task initially, especially since as novices in this field we tend to take in every new feedback as a game-changing mechanism. The result is the same as rocking a boat in stormy weather. We need to stay focused.
Here is a common example: During a meeting, if an investor reviews your product/presentation and then says the following: “why wouldn’t Google do this? It is simple enough”, your reaction should be to smile nicely, gather your things and leave! This is a red alert that the investor does not understand your turf or the business. The reason is simple: Google can basically do anything they wish to create. There is a method to their madness. It is not beneficial for Google, or for any large size company on that scale to copy your idea. It is easier for them to let you play with the product, adjust to the market, see it succeed, and then, if it is suitable for them – to buy it. Investors who truly present such a question do not understand this game. Stay away.
There are many more similar issues behind your meetings and you must prepare as much as possible in order to process the information given to you in the best way possible.
So here are a few points to take into account:
A. Study an investor’s prior investments – all of them!
- When a private investor invests in early stage companies, there could be a pattern. Understand this pattern. It could tell you much about the person. In addition, it may save you time and energy. Firstly, if an investor invests in a certain area of his/her expertise, for example: green energy, and your product is a mobile consumer app, then chances are that he/she will not know too much about your business. Trying to understand your product or simply trying not to feel incompetent, there are investors who may throw you off with questions that are irrelevant. This is another warning sign that this is not the investor for you. The same reasoning goes for investors who are interested in meeting you just to see what’s new and hot, but are not truly interested in investing. So do yourself a favor and study the person well in advance before the meeting. Understand their pattern of investment or their area of investment. If you cannot find information off their websites, then research the Web thoroughly. Find people who are connected to the investor and ask around, same as you would do when looking to find a partner. Do not come to the meeting unprepared.
- Remember that nobody likes to feel stupid, especially during a meeting, and especially not investors. Don’t let them. By performing the right prior research and sending information ahead of time, you will make both sides much more comfortable and at ease.
- If you come to a meeting and the investor hasn’t read your materials in advance, that’s a red alert as well. It’s similar to a job hunter who comes to a very important interview and the boss hasn’t read their resume. It might work out but I wouldn’t count on it. Seriousness should come from both sides. Consider whether any questions from such an uninformed party would be important to you.
B. Before a meeting with a VC
- All of the above holds true for a meeting with a VC. The information is much easier to obtain since it’s probably already on their website. Learn the VC’s investment portfolio thoroughly! Doing so can also protect your. Here is a true story – a few years back an early stage company presented their exceptional product to a VC without doing their proper homework. The VC asked its questions and then implemented the nuances in a similar company they already invested in. Unethical? Yes! Did it stop them? No (at least from what I heard). It’s true that it’s rare and the VC got a bad rep for it – nonetheless, don’t take the risk.
- Most VC’s have a fund that operates on a 7-year term. That means that during the early years of their fund, VCs invest their money in first round investments. During the 6th and 7th years of their fund they’re very unlikely to make first time investments in early stage companies. Rather they reserve this money to invest in their already existing portfolio. During my travels I met with some truly nice VC investors that told me at the beginning of the meeting that the fund is in its 6th or 7th year and they’re unlikely to invest. That puts the meeting in a different perspective. The meeting is still important, as you may learn much. Use the time wisely and respect the hour given to you by the VC. Develop the right relationship but don’t come out disappointed, as it is not you or the product that got a negative response. It is simply not within the VC’s administration protocol to make such an early stage investment. Knowing that ahead of time will also help your prep properly for such a meeting. You may tell the VC investor that you know that the VC is in their late stage (i.e. 7th year or so), but their opinion counts and that you wish to learn from their feedback.
C. Listen to the investor’s comments
- Most serious investors live this industry day and night. If during a meeting you see that they understand your product, than run with it. Don’t try to slowly explain your presentation to people who already get it and are thinking 2 steps ahead. Keep with their pace. The meeting will flow much better and you will be able to absorb much more.
This may seem like a lot of work but it’s important work if you’re serious about fundraising. Next week we’ll discuss further preparation pointers. Questions/comments are welcome.