Early Stage Funding · Fundraising

How much screening can (should) you do with early investors?

Lucas E Wall

December 16th, 2015

We are planning to go through an early round of investment. We refer to it as F&F but more likely will include acquaintances and referrals through our network.

We are planning to put together a business plan and other documents to show to them, but we are also trying to find investors who can make the project expand.

We expect these investors to make connections, open doors to get meetings with potential clients, provide guidance and knowledge to the industry.

When described like this, it sounds more like we are looking for advisors who also invest at this very early stage.

The goal of this round is to speed-up the discovery of a product that can serve the entire F&B, and may be retail, industry(ies) in the future.

There could be a later round once proven there is a viable product when the need will be to scale operations fast.

At this stage, how much vetting would you do?

Have you approached investors as if recruiting team members?

How do you convey to them their "obligations" including those I mentioned before? And then how you make those commitments materialize?

How do we avoid starting with very high expectations just to end accepting someone who simply writes checks?

What I am not asking that I should be considering?

Max Avroutski

December 16th, 2015

You are asking for level of commitment that only full time investors can afford to provide and VC. Their interest and work in helping you doesn't depend on only you, but on other stuff that is happening in their lives and their other investments. I think you are being absolutist on this.

I would suggest for you to take the money when you need them from people who will not course you too much problems, who can afford to lose them and still would speak with you if they lose their money on you, preferably investors with a track record of investments. If they help you good, if they are too busy then not optimal, but at least you got the money, and that is what it's all about. If you have money you can get ANY access. Because the only reason you want access is to get more money, so just take the money and buy access from professional access sellers. You don't want access for their jokes.

Raise money from few other investors, now you do diversification. I don't think any investor would invest under the gun of being required to provide access because things happen that is not their fault and it would be nearly impossible to explain in a contract to make it bullet proof, but they shouldn't be penalized for giving you money.

But there is a thing that you can do. Refuse all future investment rights, and only allow investors that help you the most into future rounds. So if they want back in they would have to work for it. If your business is strong no reasonable investor would refuse to invest under such term, if your business is weak you would have to sell your first born and negotiate away everything.

Family, Friends & Fools should be educated and maybe put into a system where they could diversify, but that is a different conversation.

Daniel-Flavius Lucica

December 17th, 2015

First, you should define and be aware of what are your wants and needs. What is your clear goal. Make a plan and prioritise those wants and needs. Know where you are standing.

Next, you should discuss with investors openly about everything. Be aware that investing money and time are two different things and should be negotiated separately. Do not take it for granted and do not assume anything. Make sure it's documented detailed enough, clear and understood.
Most investors value their time much more than a fraction of their money, for obvious reasons. They will usually ask for more equity if their time is involved.
Don't assume that if they invest money in you, you will get their time as well. They will usually have clear proportion between the two. Try to find out what that is, as it is different for every investor and it has to do with your current ranking in their investment portfolio.

Do the necessary due diligence (some of the previous replies I read make sense), but be very careful about interviewing or questioning them. Investors are not employees, so it's best not to treat them as such. You actually will work for your stakeholders. It's all in how you approach it. If you come down as condescending, it's over. Always maintain the open and friendly approach. Proper negotiation is an art.

Try to find out where do you rank in their portfolio. Your ranking will be directly linked to their involvement. After all their day is just 24h, just like everyone else and they will prioritise. They didn't get where they are without being disciplined and efficient. Use common sense and never underestimate an investor.

Play your role well and they might even mentor you for free. But they would do it for you, because they like you and not for your company. Some investors might invest in you even if they hate your current idea. Those are two different things. Approach them accordingly and do not mix them.

Jacob Kuczeruk VP of Business Development at West Agile Labs

December 16th, 2015

We just had a terrible experience with an early investor writing a check before negotiations were completed and then backing out because he didn't like our proposal. In my experience, it's imperative that you not only thoroughly research these guys, but check to see if they're accredited investors and actually speak with some of the other companies they've invested in. I'm always around for a call to elaborate further. Jake

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

December 16th, 2015

"What other companies have you invested in, and can I chat with their CEOs," is a fair question. Expressing your expectations beyond money is also fair game. Just be careful, as going too far with what may be perceived as an interrogation/job interview might not sit well with the investor.

Lucas E Wall

December 16th, 2015

@Jacob - Good point about asking which some other companies they've invested in. It reminded me I read somewhere about reaching out to CEOs of those companies to get their perspectives and feedback. Thanks.