By Matthew Cushen
‘Smart money’. It’s the cliched phrase used to describe an investor that brings – as well as cash – expertise in a sector, a bulging black book of useful contacts and boundless enthusiasm.
When entrepreneurs start out on their fundraising journey they think they will be showered with funding offers and be able to pick and choose from all the smart money. By the end of the process they might be feeling as desperate as a spotty teenager at the school disco.
So what should an entrepreneur expect from an investor and then do to bring those expectations to life?
Don’t expect too much
Usually it’s best to keep expectations modest (we’re back at the school disco again). After 12 years’ angel investing it still never ceases to amaze me how little investors want to interact with their investments.
The majority of investors are looking for somewhere to sweat their money but not themselves. They are usually busy people already, otherwise how would they have the wealth to take huge risks with start-ups. You should keep these investors updated – a consistently timed quarterly update of a page or so and a full update with accounts each year.
But don’t take it personally if they don’t even respond. Equally, don’t fall into the trap of thinking no response means you can do away with the updates. They are likely to assume no news equals bad news and then start to get on your back.
Be proactive and ask for help
More usefully there are a small number of investors that are willing to help. This might be as an interested and encouraging observer – at least responding to your updates and occasionally offering some unsolicited help. They are likely to respond well when asked for help.
So don’t be shy, either with specific requests to an individual or with general requests as part of your regular updates.
Look for an Investor Director
You may be able to secure a well-qualified Investor Director. This is a more formal role representing the interests of other investors and committing to help the business. When a group of angel investors form a syndicate it is customary for one to become the Investor Director. Even if the angels have never met there is likely to be a move to nominate a Director.
This might be the largest minority shareholder, or someone from a distinct block of investors, or someone with a noticeable expertise. If using an angel investment broker, they are likely to help facilitate this. If you have forgone the trudge of speaking and getting rejected by loads of potential investors and gone for investment from a fund, this will be a condition of the investment.
Be prepared to pay a fee
With our fund, myself or my partner Paul are very experienced Investor Directors. It is mandatory to have one of us as Investor Director for two years. There is a £5,000 per annum fee. This is not to make us rich, it is a fraction of the fee we charge our time out to large corporates, but because a transaction creates a contract and clear expectations of both parties – it holds us to account.
But avoid those looking to make money out of you
There’s a watch-out with some investors that will demand a paid non-executive seat even if they are only investing a small amount. I’ve heard plenty of instances of someone looking to make a £25,000 SEIS investment, on which they get £12,500 immediate tax relief and then ask for £12,000 per annum fees for being a non-executive director.
Of course you need to judge everyone on their merits, but there is usually a co-relation between the size of the demand and how little help they will be.
Expect to be challenged
An effective Investor Director will be demanding, challenging and supportive. Regular board meetings – bi-monthly works well – should be reasonably formal, with agenda and minutes. They should review progress, look ahead to the priorities for the next few months and couple of years and result in clear decisions.
This is when the Investor Director has a duty to protect the interests of his or her follow investors. But this should also arm them to pick up where more informal help is needed.
A supportive Investor Director will also be around, on the phone or over a pint for the more unexpected occasions when a problem or opportunity crop up, when relationships between founders become strained (I spent two hours in a pub the other night with an entrepreneur; there were tears!), or when confidence or motivation are low.
A sensitive Investor Director will also know when to lay off. If the business just needs relentless focused execution of an agreed plan then the operational team won’t appreciate someone meddling in the small stuff.
Be wary of the crowd
If the fear of meddling investors is one that puts you off raising finance, consider how this might work with crowdfunding. You end up with lots of shareholders, many of which might be useful brand advocates, and very occasionally offering some contacts. But you won’t have an Investor Director to challenge and help.
Turn to an Investor Director early on
We find our help is particularly useful at the start of a relationship – helping to challenge and strengthen the brand and product proposition, the strategy and to prioritise action plans.
Having someone with an understanding but more dispassionate about the business helps to create different options and make effective choices for how to grow the business.
Seek help to prepare to raise more money
An Investor Director should bring an investor’s perspective, so helping make decisions, not only for revenue and profitability growth but to make a business attractive to future investors or exits. They should be a huge help in creating the story to attract investors in the lead up to the next raise.
So far I’ve hoped to illustrate that there are few investors from which you’ll get more than cash, but some can be worth way more than their investors. So how do you engineer getting your fair share of the latter?
Do your due diligence on potential investors
When setting out on the funding route, think about what you want from your investors. For example, what expertise is most important, what contacts in your industry are you lacking, where are the big risks facing the business? Then have it as part of the conversation with potential investors.
Be clear about what you are looking for and will value. Dig into the credibility and commitment of an investor to provide it. The right relationships are going to be important for your success, and sanity, so for any Investor Director then take references – giving the most importance to having helped start-ups rather than success in the corporate world.
Formalise how value will be added
If someone is offering something you’d value then try and formalise that commitment as much as possible. It is easier to agree expectations before completing an investment and guards against two parties having a different view of what has been promised.
For an Investor Director you might create a transaction – it might be for £12,000, £5,000 or for some product or service in kind. But regardless is helps to creates a healthily transparent commitment to the relationship from both sides.
Don’t take them for granted
Then one last point – that is hopefully blindingly obvious, but sometimes gets forgotten. No entrepreneur should take any investor’s time or expertise for granted. There is always an opportunity cost for time given to you rather than elsewhere. Whether it’s an investor you don’t often hear from that has called in a favour with a contact or a long term relationship with an Investor Director, and all points in between, an investor will react positively to you being clear about what you are after from them and then thanking them afterwards.