By Matthew Cushen
I’ve written before that no-one would dream of launching a product or service without getting into the heads of their consumer, digging into when, where and how often your offer might be purchased and what you are competing against for a share of their purse.
On the same principle, wouldn’t it be sensible to understand the motivations of a potential investor that you are selling your business to, or that has already invested?
Here are a few pen portraits of some investor types you might come across when looking for start-up funding.
Maybe you won’t meet exactly the investors described below, but no doubt you’ll meet these characteristics in an investor in some kind of combination…
This is an investor that is intimately involved in your market, either they are professionally experienced or they have some empathy as a potential user of your product or service, for example a mother is more likely to understand baby products.
Tip: Be careful in assuming that because someone knows your market that they will understand or appreciate your idea – they may be so entrenched in the standard thinking around the industry they find it hard to see the value of your innovation.
There are some highly attractive tax reliefs available for investors in start-ups – the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). Unfortunately this can become all consuming for some investors and for them it’s more about working out about how much they will save, rather than the attractions of the business and the growth story.
Tip: Make sure you are all over EIS & SEIS – have your advanced assurance in place and understand and talk about the reliefs your investor can enjoy (see my earlier column for a no-nonsense guide to SEIS).
This is someone with time on their hands, looking for a hobby and ways to gain status. These investors can be a hugely helpful resource, might have helpful contacts and can be a place to seek emotional solace and support – but they can also suck up time.
Tip: Avoid investors wasting your time, either during their ‘due diligence’ or after they have made an investment. Sit down with them to define how they can be helpful and set expectations about when, where and who to involve them.
This is someone with stacks of experience and a relevant black book for you to use. Possibly from the direct industry you are setting up in, but potentially also with broader but still relevant experience – e.g. in marketing or finance. They are likely to have battlescars that will help you avoid the same mistakes.
Tip: Don’t take the help for granted. Be clear and upfront and agree how they can help. If they can contribute significantly then create some kind of transaction to lock-in the commitment. This could be anything from free product through to some share options that vest upon the growth of the business.
This is an investor that likes to make their money work. They will have a portfolio of investments and, as soon as they make this investment, they will be on to the next one. They are unlikely to want to get involved and you might never hear from them.
Tip: Just because you never have a reply to investor updates, or never get a word of congratulations, don’t think they don’t care. Still make sure you regularly update them and don’t be shy to ask for help – just don’t be disappointed when you don’t get a response.
The value of this person may not be in them making an investment, but they might know someone who would. Either they are just super well-connected and you can tap into their network informally or their job is to connect investors with opportunities.
Tip: Always finish any conversation with the question “Do you know anyone else who might love our idea and be interested in backing our business?”
These are investors that run funds and spend all day, every day, looking for businesses to back. They are likely to be highly structured and clear about what they are looking for – and appreciate that in an entrepreneur.
Tip: These investors have an infrastructure to support so will charge fees for their help, so make sure there is a conversation about fees up front to avoid surprises.