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Whether you have a promising start-up, an emerging company or an established enterprise, there will probably come a time when investor funding is on your radar.
So, how do you choose who to go after and who to decline?
Here are nine measures to build a matrix to help structure your assessment.
1. Interest – Does your gut tell you the investor is in it for the long haul or more interested in a quick in/quick out approach?
Look at the investor firm’s current and previous investments.
Do they tend to stick with their investments in downstream rounds or limit future participation? Have they acted as lead investor in downstream rounds?
A yes to these questions will tell you a lot about the investor’s longer-term intention.
2. Mission – What is your firm’s mission?
Here’s the mission statement for a highly respected investment firm:
“To be the first call for founders who want to make history and to partner with them as company builders in pursuit of that goal.”
Does your prospective investor’s mission statement resonate with you and your need?
Do previous investments reflect the mission as stated? Do they have a mission statement?
3. Investment philosophy or intent – If the mission statement says “what,” the investment philosophy will say “how.”
Does your firm view its investments as a long-term commitment?
Do they see investment as a financial transaction or the beginning of a strategic relationship?
4. Force multiplication – A force multiplier is a military term applied to factors that increase a unit’s combat potential. It enables fighting above your weight class.
Related to investment intent, do you see potential for your prospective investor to be a force multiplier?
Will they help your competitive position? Help you achieve your strategic operational goals? Help you establish your firm as an influencer in your segment? Help you reach other industry influencers for board positions, advisory positions, etc.?
Has the investor demonstrated this approach in previous investments?
5. Mosaic approach –Mosaic describes how a firm collects bits of information and how they blend these bits in a mosaic that helps identify good investments.
How your investor approaches this will help you understand how they evaluate your firm and how they arrive at a value for it.
Knowing their mosaic process can help you as you negotiate the terms of an investment in a positive way.
6. Patience – You’ve probably heard the term “patient capital.” Patient capital has a longer horizon than capital that’s in it for a quick hit.
As a serious business executive, you no doubt want a long-term partner.
Here again you can probe, do your due diligence on the investor and determine where they fall on the patience continuum.
The investor’s track record will help verify patience, so inquiries directed to other current or former investments are appropriate in your due diligence.
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7. Fit – Cannabis is a new and evolving industry with some good tail winds and some potentially serious head winds.
An investor’s understanding of your industry will help you assess how well they know what they’re getting into, and how well they are prepared to weather a few setbacks, if necessary.
8. Valuation – Valuation of your company is a delicate dance.
If you’re a growing firm with sales, good cash flow and profit, this can be straightforward – and highly negotiable in anticipation of future results.
If yours is a new and promising company, you need a compelling story and you can expect your pro-forma projections to get a serious haircut.
In either case, how does the investor navigate future commitments?
Here again, a combination of discussion with the investor and research in past investments will help you understand if your prospective investor has a long view.
Valuation will determine how much of your company you sell – an amount you should be comfortable with.
9. Blend – Your investor may request or require a board seat. Among past investments, have they fit in with the existing board?
Are they inclined to focus on strategic matters (good) or get involved in management decisions (not so good)?
10. Decision time – Your matrix is built, you’ve set up a “score card” and, assuming the investor is ready, it’s go/no go time.
If the light is green, go; if it’s yellow, think carefully and consider further negotiation.
If it’s red, the best way to decline is to be up front, tell the investor their proposal doesn’t fit your needs at this time, but that you look forward to keeping them in the loop.
John Stearns can be reached at editorial@mjbizdaily.com.