By Gajan Rajanathan, Highland Europe.
It’s much easier to file for divorce than to part company with a difficult shareholder – so finding the right investor is essential. As a critical first step, do your homework. Make a checklist of the main things you are looking for - beyond the capital - which will encompass (in no particular order) geographic reach, sector experience, ability to assist with talent recruitment and strategic introductions. Also ask yourself whether this is someone to whom you would instinctively make your ‘first call’ in a crisis. If the answer’s no, then they are probably not the investor for you.
Beyond thorough internet searches on potential investors, their firms and investment parameters, speak to your fellow entrepreneurs (including those in their portfolio). Most will talk frankly in confidence, and will give you the lowdown on good and bad behaviour. Listen for hesitation – if someone is reluctant to be fully forthcoming, then dig deeper.
Negotiating terms is much more of an art than a science. The two basic emotions driving investments are passion and fear: the desire to want to be part of the next big economic home-run and FOMO - the stomach-churning fear of missing out. No one wants to be the person who passed on Facebook.
Typically you will optimize terms when you have multiple firms looking to invest in you. The goal is to identify and win over the right advocates at firms that will be a good fit, and have a few of them move forward aggressively on the same timeline – so make sure you manage the competitive process well.
Ultimately, remember you hold at least some of the cards. Capital is becoming a commodity in today’s market, and that availability of investment coupled with the lowest-ever costs of starting up a business, mean there has never been a better time to be an entrepreneur. You actually have more negotiating firepower than you think.