Entrepreneurship is full of risks. A big risk is the wrong investors turning a good opportunity into a nightmare, a failure, or both. Entrepreneurs need to take the time to find not just investors, but good investors.
By good investors, I mean most people who are honest, available, and supportive. Bad investors will meddle, distract with endless input, blow you off, and lack empathy for the genuinely difficult task of creating something from nothing. Good investors will defer to the team, constantly cheerlead, provide targeted guidance, tolerate bumps, and work to earn trust.
When I started Getaway, I was paranoid about bad investors. I'd heard too many stories about shouting matches and bad actors and had a few near misses myself. This led me to be wary of sharing information, asking for help, or trusting that my backers had my back. Five financing rounds later, I feel fortunate to have a genuinely good group of investors. Here are some tips so you can find the same:
1. Be transparent.
I mean real transparency: Seek opportunities to highlight what you haven't figured out and what isn't working. This builds credibility, as everyone knows startups have warts. That credibility helps you avoid investors pestering you to find the real story, and it avoids surprises once prospective investors become your co-owners. If someone is scared off by your openness, they are a bad investor and you have done well to scare them off.
2. Wait as long as you can.
The usual reason to delay fundraising is to minimize dilution. That's worthwhile, but there is another reason to wait as long as possible: to solidify the company's vision, mission, values, and brand pillars. These take time to get right and are much easier to establish before you have even the friendliest outside influence over your shoulder. If you raise after those foundational elements are solid, the investor literally buys into them -- they become bedrock. It would have been harder for Toms or Warby Parker to introduce their free pairs after investors started pouring over their financials. Just as you wouldn't pick your kid's college major while they are a toddler, you want to give your company time to grow before committing it to a particular path. Every time you raise money you are making a bigger commitment to a specific path.
3. Ask questions.
Often, entrepreneurs think they are only supposed to answer questions from investors, but you should be asking tons of questions as well. Ask about a time an investment went well, and a time when one did not. Work to understand why they want to invest -- is it just for the money or is there a deeper connection? How can they help? Where can't they help? How and how often do they interact with their other companies: Is a quarterly written update enough, or do they expect to be on the phone weekly?
4. Do reference checks.
Once you have the investor's view of what they are like to work with, ask around. Ask the investor to introduce you to others they've worked with, and try to find backdoor references -- people the investor has worked with who they haven't introduced you to. Be sure to ask what advice that person would have for you at the outset of your relationship with this investor and if they would take money from the investor again for a future company.
5. Take many shots on goal.
In business, leverage is key: The easiest way to say no to bad investors is to have alternatives. Do all you can to have more potential investors than you'll need. Build a long target list, and run your fundraising on a tight timeline to create competition and a need to move quickly. That will allow you to compare your options, say no to those you feel uncomfortable with, and hopefully walk away with a group of great investors.
I've made it this far without using the grand cliche, but here it is: You're getting married to your investors. You can reduce the risk of a bad marriage by limiting the rights you give investors (see: leverage). Nonetheless, your investors will be on your cap table for years, likely until exit. Having backed myself into a few corners over the years, I deeply understand the often urgent need to raise money. But having lived to tell about it, I am confident in saying that short of killing the company, almost anything is worth doing to avoid raising money from the wrong investors. Take your time and do your diligence -- you know the investors will.