Raising capital for a startup takes time and patience. The process requires meetings with multiple potential investors and presenting the company. This is followed by due diligence reviews of the company by the interested investors. Investors then engage in discussions of valuation and terms required for making an investment. The process of negotiating terms requires patience and recognition that the startup will never get an ideal deal because the investors want the best terms they can obtain.
During the process of meeting investors, one group may take a strong interest and lead the investment. This means that this group will do all the work in reviewing the company and negotiating a term sheet with the company. The lead group would then syndicate the investment with other groups they work well with so each of the syndicate members shares the total investment. This spreads risk among a group. The lead group also may take the responsibility of managing the investment and sharing performance information with the syndicate.
Sometimes, more than one investor group shows strong interest. This scenario has the potential to help the company play one-investor group against the other and negotiate terms that are more favorable. The trade-off may be that less funding would come from the singular group unless they have a syndicate of their own.
When interacting with investors, it is important to recognize that the startup will obtain much more than money. Investors have experiences they are often willing to share. Some investors require Board Seats, while others are happy to provide advice and introductions or serve as consultants. Great advice and introductions are always helpful and welcome. On the other hand, some investors’ interactions detract from the goals, direction, and progress of the company. The investor may even become adversarial in their interactions. This causes the company to spend time and money on activities unrelated to the primary business.
When more than one investor group is at the table, the company has options of considering the investors and terms that may be most beneficial to the company. The ability to select the best of the investor groups to be part of the company is a blessing. Usually, companies do not get this alternative because they need funds and have no other options. Picking investors that provide great business council, advice, and introductions helps the company improve and grow much more quickly.
It is important to remember that the company always has the option of not including an investor or a group. This may result in not getting an investment, but that may be better than having continuous trouble in the future. The company should evaluate the investors and make an effort to include those that will be provide the most benefit in addition to their money. Keep in mind that an investor is a partner whether you want them or not. So if the opportunity exits, choose wisely!
You can follow Taffy Williams on Twitter by @twilli2861 and you can email him with questions at firstname.lastname@example.org or contact him via company contact info in the website. More Startup information is contained in his personal blog.