Entrepreneurship is super challenging. If it wasn't, everyone would do it. The reality is that building a successful business from just an idea is statistically close to impossible, and the reason, one among many, is that every step you take along the way can make or break the company. Raising capital is no different.
To add to the already complicated situation of building a startup, your instinct is to take the first check you are given, because capital is your oxygen, your runway to help this company take off. Why waste time looking for better money when you have capital right in front of you? The answer is of course that your investor should be a partner, someone who not only writes a check, but who helps that check turn into a return for their investment.
Here are some things you should look for when raising capital for your startup:
Find an investor that is all in, or all out.
There are two types of entrepreneurs and there are two types of investors. The goal is to match up these types with each other. If you are the type to want as many smart minds around the table who can help navigate the dangerous waters using their collective wisdom and experience, then make sure to find an investor who plans on sitting at that table.
If, however, you are the type of entrepreneur who wants to run the show and have less cooks in the kitchen, make sure you find an investor who will write that check and let you run the show.
A dangerous mix is an investor who wants to be hands-on and an entrepreneur who wants an investor that is hands-off.
Make sure your investor brings mental capital to the table as well.
Whichever type of entrepreneur you are, whether you want your investors involved or not, it is important to have someone you can turn to for advice and guidance and who brings experience and know-how to the equation.
Ask yourself what this investor has done in the past, how they made their money, and what makes that person the ideal partner for you and your business. Can they share insights on the market? Do they have strategic relationships that will help open doors in the future? Are they familiar with the challenges associated with scaling a business? Here is a good rule, albeit, not a hard rule, which means there are of course many exceptions. A good investor is one that has been there before, one that went through what you are going through.
Again, there are many investors who have never been entrepreneurs, but one that has will always understand your challenges better.
Think of it like a job interview process or dating, only much stricter.
You are going to hear this from many people along the way, but allow me to be the first person to tell you this; an investor is like a spouse, and once you take that money, you are married to that person for the better part of the next decade.
You often think the investor chooses you, but that is a common misconception. You need to choose your investor. They need you just as much as you need them, maybe more.
Is this investor right for your stage? Have they invested in your space? Maybe they are invested in someone you consider a competitor.
More important than any of that, how does this investor's portfolio companies feel about their work together? Is the person helpful? Are they difficult to work with? Do they get involved where they are not wanted? These are some of the questions you need to ask yourself and others before signing that term sheet.
Go out of your comfort zone and check references, just like you would for a job candidate or if you were about to be set up with someone on a date.
The most important point to remember when raising capital is that you view this injection of oxygen as something that has to breathe life into your company and not something that will end up suffocating you and causing your company to eventually die.