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When do you say NO to an investor?

01.26.13_technewsrprt_img_stories_regina-timothy_investor-noAs a startup have you ever said no to an investor? Does it make sense to wait for the right investor even when you are struggling?

These are questions entrepreneurs find themselves asking at one point or another during the lifetime of a startup.

Investors come in many forms:

  • Hands on – they want to make decisions for their percentage,
  • Arms length – limited decision making but active monitoring of their investment)
  • Cash only: they are a bank, no more no less which means.

It’s always important to understand what each investor is bringing to the table in order to be able to decide if they are a suitable match for your venture.

In each case, whenever you invite someone new to the table, you run the risk of losing more than you might think you are gaining. Investors and partners, while they have their place and can bring benefit the venture, they can also create the worst of business divorces.

While there are very many reasons why you would say no to investor, here are ten of the most common reasons why you should say no.

  • When the effort, expertise and time that you will invest in the business outweigh the startup capital and the benefits you would get on evaluation don’t balance out.
  • When they start bringing unwelcome steering or controlling decision affecting the business.
  • When the legal process of accomplishing that goal is too difficult / painful / distracting / stressful, then it’s a sign that they aren’t going to have a productive partnership with you .
  • When their ideas for the company, product line or personnel are not in line with yours.
  • When the investors would not be able to contribute to strategic vision of the company i.e. the only thing they bring to the table is MONEY.
  • When their portfolio does not align to your organization?
  • When they ask for personal warranties. Only accept liability in direct relation to your ability to control and/or exit.
  • When capital has no placement. Never take capital just to take it. The cost of investment capital is generally substantial, so you must have a defined utilization, and the ROI of that utilization must outweigh the projected cost of capital.
  • When you haven’t received the necessary advice relating to the long-term goals of both the investors and your team.
  • When they have interests in the same market.

Fact of the matter is, once you do decide to raise capital make sure it’s from the right people and remember that the more people you involve the more work it’s going to be and also often the harder it is going to be to keep everyone on the same train of thought and dedicated to achieving your vision.

Like marriages, all business partnerships and investors start with the best of happy and intentions filled with potential, but when the honeymoon is over the real personalities begin revealing themselves. Do your homework, “live together” first.

It is always wise to wait for the right investor because struggle is a given in a start up. A wrong investor will only focus on his return. In the process, your shares will get further diluted if another (right) investor comes in at a realistic valuation. Always remember, it never hurts to have an exit strategy, invest in a great business lawyer up front to protect your return at the end.

If you are in the market for potential investors, here are five quick questions to help you evaluate them.

1. Are they who they say they are?

2. Can they do what they say they will do?

3. What do you need to give up in exchange for their help?

4. What do their client references say about how they do business?

5. Why do they want to help you?

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About Regina Timothy

Profile photo of Regina Timothy
Editor of TechNews Report. Loves all things technology
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