Five Steps to Choosing a Good Investor

Seeking an investor? Take these five steps to protect your company from making a bad choice.

1. Know the investor's personality. Different kinds of investors have different reasons to invest. To glean personality clues, listen to the questions investors ask. An obsession with operational detail is often a sign an investor will want to take part in day-to-day company management. If you need additional management help, that may be to your advantage. But it can easily turn into a case of too many chefs spoiling the stew.

2. Do background research. Internet-based reference search companies, such as, Inc. and Inc., provide quick and easy ways to know if your investor has any skeletons in the closet. Reference search services access databases of business licenses, criminal records, bankruptcies, real property transactions, civil court judgments, even utility bills. A basic search through such a system costs $8 on average.
Within the search results, look for inconsistencies. The absence of data may be more important than the information itself. If very little is available on a person, it could be that they pay cash for everything-or it could be more insidious, like their whole personality is fabricated. Likewise, multiple occurrences of different names, or different spellings of the same name, may indicate previous fraud. Also, avoid people involved in multiple lawsuits.

3. Get help. Get an outsider or a consultant to look over the deal. A consultant has no stake in the deal and can operate at a level above any particular self-interest. If you cannot afford a paid consultant, look within your own network for a person whose judgment you trust.

4. Set expectations. Perhaps the most overlooked aspect of taking on an investor is setting expectations. Even when a formal contract or subscription agreement exists, it rarely addresses issues like mentoring and management. Do you expect your investor to help manage the business or to keep his distance? Let him know in advance.

5. Tackle problems quickly. At the first sign of things going bad between you and the investor, begin a clear and professional dialog. If you explain to an investor that his actions are counterproductive, you may not only change his behavior but also win his respect. If you are less fortunate, you will end up with an angry investor-but you may save the company.



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