While it can be tempting to jump on any offer when you're trying to get a business off the ground, choosing the right investor can make all the difference for your company down the line. Ideally, a strong relationship with your early investors involves much more than just a signed check. (But not too much more, as you'll read below.)
To find out which red flags are worth investigating more closely, we asked a group of successful founders from Young Entrepreneur Council to describe what they look out for.
1. An unclear time investment.
You have to do an intense background check on your investors before you ink a commitment--I can't stress this enough. You also have to exactly understand their time investment. A lot of young startups make the mistake of thinking their investors will be more involved than they are, so you have to really understand what you're walking into.--Rob Fulton, Exponential Black
2. A poor reputation.
Your goal in choosing an investor is to find the right partner, not just any warm body. Find one who shares your goals and will support you. In addition to funds, the right investor can help by being a trusted adviser; facilitating connections with potential business partners, employees, or additional funding sources; and by lending credibility. Someone who isn't trustworthy won't be of much help.--David Ehrenberg, Early Growth Financial Services
3. An inability to embrace failure.
The underlying tendency of a startup is to fail. Those that succeed are anomalies. An investor who cannot embrace failure can be a destructive force when the going gets tough. Founders should look up a potential investor's failed ventures, and reach out to founders of those startups to listen to their experiences and evaluate whether or not the investor is sportive enough to build a business with.--Vishal Shah, NoPaperForms
4. A lack of relevant experience.
Investors who do not have experience in the industry that you are in or with the types of customers you are serving are not going to be able to relate to your situation and provide as much value. On the other hand, investors who have strong ties in the industry and understand the problems you are solving will be able to provide better introductions and feedback.--Randy Rayess, VenturePact
5. A misalignment with your vision.
Taking investment from someone who seeks to change or alter the founders' vision for the company isn't a good choice. It's the same as going into a romantic relationship assuming you are going to change your partner. If an investor invests thinking they will change the vision of the company, that will ultimately lead to strife, arguments, and disappointment. Investors should help shape the vision, but not dictate it.--Brewster Stanislaw, Inside Social
6. Someone who only evaluates the numbers.
Your investors should be your biggest fans and supporters. You should avoid an investor who takes an unreasonable stance at inception or tries to negotiate overly burdensome financial terms.--Matthew Moisan, Moisan Legal P.C.
7. An expectation of quick returns.
You don't want to have an investor who is calling you weekly asking, "Can we sell yet?" The investor must recognize that this is a long-term investment opportunity, not a day trade.--Adam Stillman, SparkReel
8. A focus on short-term thinking.
The worst investors are ones who look less at the big picture and more at short-term gains. That sort of attitude is mainly bothersome to deal with. In some cases, it can also be toxic, which can negatively impact your vision and outlook for the company.--Firas Kittaneh, Amerisleep
9. Someone who adds no value beyond money.
Avoid adding investors who add little to no value beyond money. More often than not, the added value of gaining direct access to an investor's network of contacts, relevant experience in your area of business, and free business advice at critical stages of your business is more valuable than the money. Investors who don't add value beyond money should be disqualified from your search for capital.--Kristopher Jones, LSEO.com