5. You skimp on advisers
Spend as much time selecting the right lawyer (or investment banker, or whomever will be acting as intermediary for you) as you'd spend on anything else. "Don't hire your cousin, the lawyer," Rick Rickertsen says. You don't necessarily need someone from a huge law firm, but you do want someone with solid experience in the size of deal you're trying to make. That someone is most probably not the lawyer you've worked with on other matters. As with any other important hire, ask for references and check them.
And once you find great advisers? Keep on top of them. "Don't let your lawyers run the process," says Alex Temel. "Make decisions about what's important to you and have your service provider implement that." Sure, this is time consuming, but you want to make sure that your lawyer isn't wasting time arguing over points that are really not that important to you. "Look, at the end of the day it's your deal, and it might be the biggest one you ever make," says Rickertsen. There are plenty of times that CEOs need to learn to trust and delegate. This is not one of them.
6. You don't acknowledge your weaknesses
Once you've found an investor you feel good about, you'll want to pull out all the stops and make the best case for your company. But don't get carried away. "Entrepreneurs think the investor wants to see a perfect company and try to position their company as perfect or nearly perfect," says Rickertsen. "Investors know that all companies have challenges, and saying that there aren't any almost always gets the business plan thrown in the trash can." If you have a strong competitor, a major contract that isn't going well, or the threat of a potential lawsuit, fess up early, he advises. The investor will find out in due diligence, and then you've got a credibility issue, which can be the end of the deal. "I've seen a number of deals crater because the investor doesn't believe the founder can be trusted," says Temel.
Of course, it can be difficult to acknowledge weakness, and you'll want to do so with some finesse. You definitely want to lead with your strengths, says Temel. "It's like dating--you meet someone at the bar--you don't tell them about your parents right away." Adds Rickertsen: "Put your best foot forward, lay out the selling points for your business, and then be accurate about your weaknesses, and explain what you're doing to address them."
7. You don't do your homework
All investors perform due diligence on potential deals. But few entrepreneurs return the favor. "Entrepreneurs do a lousy job researching their investors," says Rickertsen. To be sure, most investors aren't out to do you wrong, but it's up to you to make sure that you aren't dealing with someone who will seem crazy on closer examination or otherwise be a bad fit for your company.
Investigating a would-be investor is not particularly difficult. Talk to other CEOs the investor has worked with. Rickertsen suggests you speak to at least three of them--including people running companies currently in the investor's portfolio and those who have moved on. Any reputable investor should provide you with names and contact information. Ron Norelli, chairman of the Norelli Group, a private equity and financial advisory firm in Charlotte, North Carolina, suggests you talk to CEOs whose companies the investor has held for the whole cycle--from initial investment through sale, merger, or IPO. Ask the same questions you'd ask a potential employee.
Next, Rickertsen suggests, ask the investors how they'd handle things when times get tough. "Find out what their definition of failure is. If you miss your plan by 15 percent, what will you be hearing from them?" It's not a fun subject, to be sure. "Some people are uncomfortable with having those hard conversations in advance," he says. "But it's just a mistake in the long term not to."
8. You ignore the importance of chemistry
When Christopher york sought funding for his company, he met with half a dozen potential investors. He was seeking the right financial terms, of course, but York was also looking for something else: someone that he wouldn't mind spending a lot of time with. "It's one of the most important things to figure out: Can I get along with this person?" he says.
While you're sussing out your private equity investor, don't overlook a very important indicator: your gut. While the private equity investor is trying to figure out what you're about, "the entrepreneur also has to be asking, are these the people I want to deal with, and for five, seven, nine years?" says Norelli. After all, these are people you'll be talking to on a monthly, if not weekly, basis. If you don't like them, your life is not going to be pleasant.
This is perhaps the most subjective part of choosing the right investor. A deal can look great on paper, but if the investor gives you the willies, you probably should find another deal to pursue. As in romance, it's hard to say what will create that "click." Obviously, everyone has different tastes and preferences. In retrospect, York thinks that communication style is what helped create the needed chemistry with his investor. "I'm the kind of person who isn't overly formal, and I wanted to make sure that I wasn't dealing with a bunch of stodgy investors," he says. He got that too-formal feeling from the investors he rejected and went the people he felt the most comfortable with.
