Many entrepreneurs embark on their journey through a desire to “be their own boss,” little realizing that teaming up with the wrong investor might leave them working for the boss from hell!
I had heard enough of these cautionary tales to make me wary of raising money and so I avoided this as much as possible by focusing on businesses that I could bootstrap and fund through revenue. And I managed to do this a few times.
However, with my latest venture, the first merchandising-as-a-service solution for retailers — Stylyze, I needed to face my fears and see if I could flip the script as we recognized that we need to bring in specific talent to help elevate our business and put it on the fast track to success.
Stylyze is a technology company, yet neither I nor my co-founder Lisa are technical founders. Building the technology platform required to bring our vision to life was going to require some capital investment. And that meant finding investors.
We ended up closing our first capital in 2015, and I am happy to report that five years later, working with our investor team has been one of the best parts of the Stylyze journey. Below are my three top tips to help recruit game-changing investors:
1. Recruit an investor as you would any member of your team
You know the saying “hire slow, fire fast”? Take that approach with investors, because once you have “hired” them it is virtually impossible to “fire” them. They are on your journey for the long haul. The good news is that if you take the time to recruit the right investors, they will provide a lot more value than just working capital.
The first step is to determine how much capital you need and therefore what type of investor you want to target. For example, will angel investors be the right fit for your round, or do you need institutional capital? If you are targeting institutional capital, will venture capital be the best fit or is private equity an option?
Once you have made that decision, understanding how the mechanics of how those capital sources work becomes vitally important. Angel investors invest their own capital and therefore make their own decisions and manage their own investments.
Angel investors often invest in the founding team and in businesses that they personally have experience with or are passionate about. The great thing about angel investors is that you know who you are dealing with and there most likely won’t be any change in management of those deployed funds.
Institutional investors, on the other hand, invest other people’s capital. They are accountable to their Limited Partners and often have investment guidelines that they need to follow. Also, for them, this is a job which means that they can change jobs and your account will be passed onto someone else.
Having said that, most institutional investors have an investment thesis that guides them as well as cultural principles. And, they are just people after all, so building a relationship with them and making sure you have good juju is really important.
This brings me to the punchline: recruit investors like you would any member of your team. Once you decide the type of investment you need, then look for the best people to work with.
I’ve found these questions great to ponder before taking capital:
- Will this investor accelerate my business outside of capital — i.e. do they have expertise or networks that would be helpful?
- How does this investor like to participate with their portfolio companies? Are they hands-on or hands-off?
- Will they require a board seat or other oversight?
- Do they have a “syndicate” or other investors they like to invest with?
- What is their investment track record and how have they handled the successes/failures?
- Are they a good cultural fit?
- Do you like them?
So how do you find these wonderful investors? Referrals from other entrepreneurs and portfolio companies in funds you are interested in is a great place to start.
Once you meet with investors and find some you like, they will often connect you with other investors in their “syndicate” which brings me to tip #2.
2) Find a great lead investor
Even if you are raising an angel round, your life will be much easier if you recruit a great lead investor. Lead investors are just that — they lead your round by investing a substantive percentage of the required capital, negotiate your term sheet and other legal documents on behalf of the investor group, and they may be looking for a board seat or other advisory role.
Regardless of the type of investor, the world is small and investors like to invest alongside other investors whom they know and trust. So much so that sometimes the investor(s) you have committed to your round is almost as important to other investors as your business itself.
As you go through this process, bear in mind that the hardest investor to close is your first investor. No one wants to be the “lone nut.” The upside is that if you recruit a really well-respected lone nut they won’t be “lone” for long, and other investors will pile on to join them.
In the case of Stylyze, we raised an angel round and recruited a fantastic lead investor who has partnered with us in fundraising initiatives ever since.
3) Communicate with your investors regularly and transparently
Once you have recruited a fabulous lead investor and filled out the remainder of your round, how do you keep the positive juju flowing and ensure you don’t have an investor mutiny when the going gets tough? Notice the prior sentence says when the going gets tough not if.
It’s impossible to be on the entrepreneurial journey without having some bumps in the road. Having a great relationship with your investors will determine if and how they will help you work through the bumpy patches.
The best way to maintain a positive relationship with your investors is to communicate with them regularly and transparently. Nothing is worse for an investor than six months of radio silence that is broken by a request for more capital.
In my experience, quarterly investor reports followed by quarterly meetings have been a healthy cadence of communication.
If there is big news between updates that can certainly be communicated ad hoc, but at the least knowing that an update will be delivered quarterly with an opportunity to meet and/or listen to the meeting recording following has provided peace of mind for our investors and accountability for my team and I.
It has also enabled us to foster closer relationships with and between our investor team which has positively impacted our journey in many ways.
Despite my initial fears about working with investors, I’ve found them to be a bright light in the Stylyze journey and they’ve completely changed my perspective. By thoughtfully recruiting our investor team, finding a great lead investor, and maintaining a consistent cadence of communication investors have provided us with far more than just capital.
They have provided expertise, mentorship, connections, and encouragement through the good times and the bad. They have become lifelong friends and mentors and I am grateful for each and every one of them.