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Why you need to be careful about who you let invest in your startup

Posted by Kanika Sinha

January 29, 2017

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Choose your investors carefully. This is an important statement because it can mean the difference between your startup’s success and its failure.

Let's take a look at why you need to be careful about who you let invest in your startup.

Friends and family

This may seem counter-intuitive, but in all reality, friends and family don’t always make the best investors.

We acknowledge that friends and family are often the first people startup founders look to for cash.

Sometimes this works out great, but for those of you who have a nagging feeling about taking on Uncle Matt as an investor, we advise you to listen to your intuition.

Before you let friends and family invest in your startup, you want to set some ground rules:

Present them with your business plan just like you would any investor. You want them to know exactly what they’re investing in.
Be professional when it comes to this side of your relationship. You want them to trust you and our business.
Explain all the risks to them.
Tell them they can’t sell their shares. While they might be well-versed in investments, investing in a startup is different, and you want them to understand that.
Don’t take money from someone you know is overly controlling.

Inexperienced angel investors

You want to make sure your angel investors have some experience in this type of investment. It’s hard enough to start a business without having to devote time to a large learning curve on angel investments.

Plus, you want to make sure their portfolio consists of multiple investments. This lets you know they have experience and can handle your startup.

Ego maniacs

Get to know your potential angel investors and do your research. Talk to other portfolio CEOs about their relationships with a particular investor.

They can shed light on whether or not your investor is easy to work with or too controlling.

It’s much easier to look for money elsewhere than it is to break up with an investor after the fact.

Talk to us about how our back-office services can help your startup move and make decisions faster.

Third-tier accelerators

Many startups are looking towards accelerators to get their startup off the ground. Accelerators can provide you with money as well as office space, mentor-ship and marketing in exchange for a piece of your company.

Be careful when choosing to partner with an accelerator and watch out for the following:

Read the fine print. Know the terms for your participation.
Do your research. Find the best accelerator for you.
Don’t give an accelerator equity in your company if they aren’t providing you with cash.
Talk to other startups who used a particular accelerator. Ask for their review and find out if they thought the accelerator's help was useful or hurtful.
Ask yourself if you’re getting caught up in their great marketing or if you really need their help. Can you launch on your own without the accelerator?

Final thoughts

If you’re like many startup owners, you might think you need an infusion of cash, and it doesn’t matter where it comes from. This can’t be further from the truth.

Not only do you have to be careful who your investors are, but you need to manage your investors to avoid overly stressful problems and the death of your startup.

Finding the right investors and managing them is part of your job as a startup founder. Here are a couple of “rules” to follow when it comes to your investors:

1. Don’t ignore them.

After all, they’ve given you their money. Plus, they may have some insights that prove useful.

2. Don’t let them run your company.

That isn’t their job. It’s yours. You don’t want to give in to investors when you know it’s not right for your company.

You’ll find it’s a fine balance between pleasing your investors, keeping them informed, seeking their counsel and letting them take over.

A word of advice, though – if you took on venture capital, then your investors most likely make up your board. This means they really are your boss. It can be a slippery slope, so you want to stay connected with your investors while still managing your startup.

Bottom line - you can't fire your venture capitalist.

As long as you keep them in the know, have the same goals, manage your startup properly, and gain traction quickly, you’ll find that you earn the trust of your investors.

Want more?

Escalon can help ensure that your accounting, financial records and taxes are accurately done and that they communicate the full value of your business to potential buyers. Talk to an expert today.

Authors

Kanika Sinha

Kanika is an enthusiastic content writer who craves to push the boundaries and explore uncharted territories. With her exceptional writing skills and in-depth knowledge of business-to-business dynamics, she creates compelling narratives that help businesses achieve tangible ROI. When not hunched over the keyboard, you can find her sweating it out in the gym, or indulging in a marathon of adorable movies with her young son.

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Startups

Why you need to be careful about who you let invest in your startup

Friends and family

Inexperienced angel investors

Ego maniacs

Third-tier accelerators

Final thoughts

1. Don’t ignore them.

2. Don’t let them run your company.

Want more?

Authors

Kanika Sinha

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