By Mike Woitach, co-founder of Convergent Coffee.
Cash is always the most limited resource for a new business, especially for a new entrepreneur. Simply put, if you don’t have the cash to fund your business you have to make the decision of whether to bring on debt, sell some equity or bootstrap. Each of these has its own pros and cons that are suited to different types of businesses.
If you do decide to sell equity to angel investors, which is the route I went when starting my first business, there are three things you should consider before signing the term sheet.
Make Sure Their Experience Is Relevant and Available
When you’re in the very early stages of a business and you decide to raise from an angel, you’re really raising money for two reasons. First, you need the cash. But almost as important, you’re basically bringing on a co-founder (even if the investor is passive). It helps to have someone in the ring with you who’s been through it before and can offer advice.
There are a couple important components to relevant experience. The first is industry experience. If you’re a biscuit company and your potential investor has built their career in cat food, that might not be the most relevant investor. Though, if the biscuit business is a wholesale CPG company and the investor’s cat food business is a wholesale CPG company, it could be helpful to have that perspective. The closer you can get in industry experience, the better.
The second component of relevance is actually how the investor built their business. If you’re raising angel money and your investor has bootstrapped their business, they’re going to have a very different perspective on how a business should be built and what should be done. On the other hand, if they’ve built their business raising venture capital or angel money, they’ll know what that’s like and have more realistic expectations for how quickly things can get done and what the opportunity might be.
Lastly, you want to make sure the investor can actually give you the time of day and offers sound advice in the first place. Turn the pitch around and ask them what they might do in your situation. If they’re unable to give thoughtful responses, then you might want to walk away.
Confirm Access to Solid Networks
It’s important that the investor has relevant experience in your specific industry because that’s where they’ve built their connections. Back to my biscuit example. If you’re a biscuit company and you bring on a cat food investor, all they’re going to know is other cat food people. They might be able to help you get into Petco, but that might not be so helpful if you’re selling biscuits.
In wholesale or manufacturing businesses, this is especially critical. If you’re selling to retailers, having someone who already has a relationship with the retailer and can make an introduction or two can be invaluable in getting a product sold in the first place or cutting down the time it takes for your product to get on a shelf.
A red flag to look out for when you’re looking for investors is name-dropping. Investors can be a vain lot and sometimes name-dropping is normal. But do a background check on the people they claim to know. Investing is a two-way street, even if it doesn’t seem that way sometimes. You need to be interviewing and doing due diligence on the investor as much as the investor is doing due diligence on you.
Take Your Time
Fundraising can be a slog. It can be demoralizing. It can also be exhilarating. Especially when, after weeks or months or (maybe) years of searching, you get someone who’s bought into you’re idea.
Whatever you do, don’t rush the process. As they say in the military, “Slow is smooth and smooth is fast.” Taking your time and being deliberate will help you make the right choice. If you rush the process and end up with a bad investor who has aggressive protections or too much control, that could be the end of your business. On the other hand, if you pick the right person, it could take your business to the next level.
Mike Woitach is the co-founder of Convergent Coffee, the first craft coffee brewery.