Originally Published in Entrepreneur | December 9, 2014 | By Paul Mandell
Entrepreneurs who watch ABC’s Shark Tank may think that winning an investment from the “sharks” — an illustrious group of wealthy business moguls — is the entrepreneurial dream come true. But in reality, selling a piece of your business to an investor, whether one of ABC’s sharks or a close friend, carries a variety of risks that should be considered carefully. Taken from the wrong source or from someone whose relationship you manage poorly, capital can cost you far more than you anticipate.
At a recent Consero event for startup founders, we asked the participants if they had raised money for their businesses. While some had bootstrapped, most had pursued outside investment from angels, institutions or both. When we asked those who had raised money whether they found value in their relationships with investors, the answers were mixed. In some cases, investors were a clear value-add for the business; in others, the investors had become a net negative.
Investors can be invaluable to a startup — beyond merely providing capital. Good investors can help steer the company in the right direction, providing useful guidance and opening doors to new partnerships or sales opportunities. By the same token, negative investor relations can inhibit growth by sapping a founder’s time and energy and creating other problems. Here are a few tips to make your experience with investors a positive one that provides a boost to the business.
You can set the stage for positive investor relations by choosing good investors. Assuming you have the luxury to do so, which isn’t always the case, be selective in bringing investors onboard. Keep in mind that you are embarking on a challenging adventure with a variety of stressful situations ahead. As you consider particular investors, be honest with yourself about whether you want to go into battle with these individuals. If your gut says that interacting with them during a crisis will add to the stress, rather than mitigate it, steer clear.
Moreover, be sure to take money only from those who can afford to lose it. Knowing that your failure could create real personal hardship for others will give you an added layer of stress as you build your business.
For better or worse, many startup founders take money from family and friends — not all of whom are seasoned startup investors. If you do, give thought to capping the amount that you will take from them. While family and friends may want to support you wholeheartedly and fully trust your abilities, part of being a good steward of the funds of others is mitigating their risk.
Seasoned early-stage investors know that startups are risky, and they often expect not to see the money again. However, as you bring new investors onboard, be sure not to trivialize the anticipated challenges, as well as the inherent uncertainty in building a new enterprise. It is far better to under-promise and over-deliver than set high expectations and fall short. If you spend time describing the risks that you anticipate, as well as how you plan to overcome them, your investors will not panic when the water gets choppy, and they will be focused more on providing support than demanding explanations.
Once you have a great investor group whose expectations have been set properly, it is important to keep them in the loop as the company evolves. Be sure to share news of successes but also let them know as you discover new hurdles and work to clear them. By maintaining open lines of communication throughout the startup experience, you will avoid major surprises and increase the odds that your investors remain supportive, rather than frustrated or concerned. If you wait too long to share news of significant challenges, not only may you have lost an opportunity to get valuable help, but you intensify the blow and risk losing trust.
Managed well, a strong group of investors can be a tremendous asset to a startup. And fortunately, unlike much else in the startup experience, startup founders have quite a bit of control over this area. By choosing wisely, setting the right expectations and communicating regularly, you will set the stage for a positive experience with your investors, which will make your challenging adventure through the wild world of entrepreneurship at least a little easier.