What to Look for in a Finance Partner
Most companies feel successful in their fundraising activities when they see their bank account grow with the capital that lenders or investors are willing to inject into your business. The reality is that fundraising is about more than money. I know that may be hard to hear. Especially if you are struggling to raise capital for your venture. But taking money from the wrong partner can be a death sentence for your business.
Some companies understand that point. That is why you see them focus on landing finance partners that are well-known venture capital firms or lenders. It’s because those firms bring a lot more to the table than just money.
Today we are going to talk about what you should look for in a finance partner. We’ll be specifically breaking that down between when looking for a lending relationship versus an investor to fund your idea.
Picking a Finance Partner
If finding the right finance partner isn’t just about the money (by the way, it really isn’t about the money at all) then what does matter when you are picking an investor? Some of that depends on each individual situation. But, in general, you want to look for a partner with the following characteristics.
When Choosing an Investor
An Investor that has Expertise in your Industry
Investors who have experience working with companies in your industry are really valuable partners. There are a few reasons this aspect is important. First, if the investor has never funded a company in your industry then they won’t really know what to expect. That can lead to bad assumptions. For example, let’s say you are in the ski rental business in North Carolina. It doesn’t snow year-round in that state. In fact, it gets really, really hot in the summer. So, even making fake snow is a no-go. If your investor doesn’t understand the seasonality of the ski rental business then they might not understand why revenue isn’t growing during the summer months.
Second, taking money from an investor who understands your industry is important because they might be able to transfer some of their knowledge to you in working together. You often see this with startups who work with investors that have expertise in their industry. Those investors are added to the Board of Directors so that the founder(s) have regular access to their knowledge. .
A Well-Connected Investor
It is certainly important to be good at what you do in the business world. However, the saying goes that “business is more about who you know than what you know.” Translation – having a quality network of other professionals is important.
The power of having a well-connected investor is that they can lead you to other investors. Most investment deals have a lead investor in them. That investor is the first to agree to do a deal with the company. If you get the right lead investor they can often bring in other investors without the founder(s) having to make much effort.
They Are Entrepreneurs Themselves
When taking on outside investors it is really helpful if they have been in your shoes before. Meaning, they have started companies of their own. It is even more helpful if they lead that company to an exit before, such as a merger/acquisition or initial public offering (IPO).
Not only can fellow entrepreneurs provide a lot of value in sharing their experiences and knowledge in operating a startup, but they can also sympathize with how tough growing a company from the ground up can be. The saying goes that there is nothing so lonely as being a startup CEO. When you choose investors who were, or are, entrepreneurs themselves you are less likely to get a partner who doesn’t understand how hard running a business can be.
When Choosing a Lender
While they can’t hurt, a lot of the above characteristics aren’t as important when choosing a lender to work with. That is true for a few reasons. First, lenders aren’t normally as actively involved in the operations of your business as investors can be. Which is typically a good thing. Second, depending on the type of loan, your relationship with a lender may be briefer than with an investor.
Here are a few things you should look for in a lending relationship.
Modern lenders use software to improve the overall lending experience. From online applications to automated decision engines, the idea of a group of people sitting in a loan committee meeting deciding whether or not to approve your loan is long gone. Or, at least it should be.
While real estate loans can take longer, largely due to the time needed to perform an appraisal, it is possible to move from application to money in the bank with types of business loans in as little as several days.
You shouldn’t pick a lender solely based on their turnaround time. But you should consider it when evaluating which partner to choose.
Good Loan Terms
Getting competitive loan terms from a lender is one of the most important aspects of picking a partner. That means the rate you are charged, the payback period, and what other fees are being charged. But, don’t sacrifice other aspects of the relationship for a lower rate.
They Can Evolve with your Needs
Raising capital from investors takes a lot of lead time. With the right lender as your partner, the loan scales to match the growth of your business. So, as your business grows you don’t have to stop and think about whether or not you will have enough capital to sustain that growth.
Whichever funding source you focus on, investors or loans, be sure to keep these characteristics top of mind.
There are plenty of stories of startup founders taking an investment from the wrong investor. If you have watched Shark Tank at all then you have seen founders who present on the show that are explicitly looking to work with one or two of the sharks. They might be focused on Mark Cuban because he has connections in the NBA. Or, Laurie Grenier because they are selling a product and want to get it on TV.
Any of the five sharks sitting on the show can cut the founder a check. Of course, if they only get one offer then they have to take it or leave it. But when multiple sharks are bidding on working with them the conversations often switch to what each investor can bring to the table.
That is exactly how you need to think about taking on investors or lenders. The money they are offering you is important.