Seed capital investment due diligence normally focuses on the startup. But here’s how the founder can put would-be investors through their paces.
One of the big decisions facing company founders is whether to bootstrap – that is, fund the company’s growth out of revenues and their own resources, as opposed to bringing in new capital from investors. To bootstrap to profitability, you need to scale quickly and keep refining your offering. But most companies need early stage capital to be successful.
That’s when founders really need to focus. Much gets said and written about how angel investors and venture capitalists choose companies to invest in and how careful they need to be to pick the right companies with the right people. This also applies to founders. If they are going to take on investors, they need to make sure they choose them carefully.
The right type of investor can add huge value to a business, far beyond the cash they bring to the table. The wrong type can be disastrous. Take, for example, those consultants and would-be CEOs who claim to be investing, but often end up securing lucrative, cash sapping positions.
You need to take care because seed investing is very early stage investment and requires particular skills and experience. Often a company is little more than a founder, a product and a sense of addressable market need. In New Zealand, few in seed investors have the cash and skills to move your business through the angel stage and offshore. Don’t end up with the wrong investors just for the cash. It’s better to bootstrap than have the wrong investor on board.
When you seek early stage capital, make sure you interview your would-be investors. This is often overlooked as the focus is on their due diligence on you, your idea and their cash.
Do your due diligence on them. I have allowed investors to invest in our portfolio companies that I have later regretted. It can take years to remove such an investor from the share register when the company is using every available dollar for growth.
When you seek funding, make sure you tick these boxes:
- How many early stage investments has the investor made this year?
- How many early stage investments has the investor made in total?
- Find out the names of the last few investments and reference check with them.
- What is the size of their portfolio and how many of their investments have they made in international markets?
If a potential investor does not quite tick all the boxes, consider combining them with people who are active and experienced. We need to encourage more early stage investors to get involved, and partnering can be a way to get started.
Use your contacts and find the right investor with the skills, networks and funding runway to get your company global. Investment in early stage companies is, in many respects, the result of hard lessons learned and experience. Growth companies have enough challenges, so do your due diligence and get the best investors on your team.
Andrew Duff is a director of a number of private startup companies and co-founder of Sparkbox.