5 Tips to Manage Relationships With Portfolio Companies as a Startup Investor

By Michael Whitehouse

You've found that perfect startup opportunity on 1000 Angels, the private investor network that connects startups with investors, or somewhere else, decided to invest an amount in the project, and now it's time to help that investment flourish. But just how do you move forward as an investor and maximize your impact on a startup? How can you ensure that you are having a positive effect rather than a detrimental one?

Photo credit: http://blog.topazlabs.com/

Photo credit: http://blog.topazlabs.com/

The key is to foster a positive relationship with the founders of the startup directly. This doesn't mean a personal one, but rather a relationship built on a clear understanding of what everyone brings to the table. Depending on how hands-on you intend to be as an investor, you'll need to recognize that your startup will only operate effectively if you make best use of everyone's talents. It may be that you can only contribute in a small manner, or, if you're lucky, the company runs effortlessly and doesn't require your input at all. Regardless, your relationship with the founders of the company and any management team in place, is going to be pivotal in ensuring your investment has the best possible chance of success.

With this in mind, let's take a look at some key areas where you as an investor are likely to play a role.

Regular Communication

As an investor you'll want to know that your finances are being used effectively. This requires communication with those managing the startup. Some investors will be happy to interact with management a few times a year, while others will want to keep a handle on things and stay in the loop every week. Whichever approach you take, open, frank, and respectful communication will go a long way to avoiding any disappointments or misunderstandings regarding the direction of the project.

Communication creates trust and ensures that everyone is on the same page, pulling in the same direction. As an investor there may be times that you disagree with a management decision, and in many cases you might be unable to do much about it if you do not have a controlling stake, but even in this situation at least you can be aware of where your money is being spent and how things are proceeding. All you can do is give your input, and the only way that input can be truly effective is if it is based on an informed opinion, one completely aware of what is going on within the business itself.

Business First

Unless you own the majority of a startup – and most investors are not in this position – it is important to recognize that, while you have invested money in the project, that you are not running it. The founders who first created the company or had that amazing product or service idea which attracted your interest, generally have a good idea of how to run the business and how to steer the ship. This is where you will have to put your ego aside and put business first. You might want to be involved in every decision, but you have to be honest – if the management in place are more knowledgeable about an associated industry or the daily workings of the business, the chances are they will be better at managing it than you will. 

The above, however, is not always the case. In some circumstances a management team may be inadequate or not up to the task. If that happens, then as an investor you can raise your concerns, but even in this circumstance it will result usually in bringing in a new manager to oversee the project. Ego is one of the root causes for a business to flounder, so don't get caught in the trap. Know when to step in and get involved, and know when to get out of the way and let others do their jobs. Always put the business in its entirety before any pride or ego stops your investment from being a success. 

Set Goals

We've talked about this previously in our article about how startup founders can better manage their time, but setting goals can be something which will set your mind at ease as an investor as well. By having a schedule and a clear plan of milestones for the business to meet, you can better measure where performance is high or low. It's important to remember, however, that these goals should be decided on collectively, especially if you have little knowledge of an industry or the workings of the business. It may be that something which you believe should take a short time, actually requires more substantial allocation of resources. What's important is to come to an agreed, fair, and reasonable timetable for goals. If, one the other hand, you have the experience and knowledge required to make a judgment on timescales, then absolutely make your voice heard.

A goal could be something which could take a year, a quarter, or a day to reach. Managing this progression brings on nicely to progress updates.

Progress Updates

Tying together our previous points about communication and goal-setting, progress updates are a great way to set everyone's minds at ease. They create a sense of urgency and feeling that the business is moving forward, even when accomplishments are perhaps incremental rather than earth-shattering. If you have a business goal which will take 3 months to achieve, receiving regular updates from the business about the progress each week or month will allow you as an investor to know whether a milestone is actively being worked towards.

A set schedule for progress updates can really make a difference and facilitate great organizational communication. It can help identify where there is a problem months before it would otherwise rear its ugly head. As an investor, the real balance to strike here is between receiving so many progress updates that they become redundant or even annoying to founders and management, and not receiving enough to get an accurate idea of where the business is heading. Sensibly regular progress updates which genuinely inform are what should be aimed for.

Positive Relationships are Productive Ones

The above mentioned aspects of investor-management relationships are ones which should be looked on as critical. You, as an investor, should try to foster a positive relationship with those running any startup you are connected to, in a way which uses your talents, and theirs; allowing the business to succeed off the back of good communication, planning, and use of available skill-sets.


This site is operated by Onevest Corporation. Onevest does not give investment, legal or tax advice. All securities listed herein are offered throughNorth Capital Private Securities Corporation ("NCPS"), a registered broker-dealer, member FINRA/SIPC. Onevest has taken no steps to verify the adequacy, accuracy, or completeness of any information presented herein. By accessing this site and any pages thereof, you agree to be bound by the Terms of Use and Privacy Policy. Only Accredited Investors can invest in securities offerings posted on this website. All accredited investors using the Onevest platform must be verified as to their accredited status and must acknowledge and accept the high risks associated with investing in privately held companies and early-stage ventures. These risks include holding an investment for periods of many months or years with limited ability to resell, and the risk of losing your entire investment. You must have the ability to bear those risks. To the fullest extent permissible by law, neither Onevest nor any of its directors, officers, employees, representatives, affiliates or agents shall have any liability whatsoever arising out of any error or incompleteness of fact or opinion in the presentation or publication of the materials and communication herein

Identifying the Right Investor for Your Startup

By Michael Whitehouse

Photo credit:  http://blog.acrowire.com/

As we tell our members at 1000 Angels, the private investor network that connects startups with investors, a startup lives and dies from its funding strategy. If the correct approach is taken and the right form of investment is secured, then a startup can thrive and establish sustainability. On the other hand, if the wrong type of funding strategy is implemented, a startup may face a precarious future, resulting in stagnancy and, in some cases, even liquidation.

What's right for one company may not work for another. If your startup project requires a continual stream of financing for 1 to 3 years before becoming self-sufficient, for example, then a one-off investment might not cover what you need. Other types of investments may require connections, business and advertising know-how, etc. Investors offering finance exclusively may not be adequate for your company's needs.

It's clear that implementing a funding strategy specific to your project is essential. In order to do this, you'll need to understand the types of startup investments out there and identify which type will best serve your company.

 

Startup Funding: Know Your Options

There are a growing number of funding options out there, even hybrids of popular choices, but for simplicity’s sake we can solidify these into seven investment strategies for your startup. Once you're familiar with each, you will be better placed to choose which is best for you and your business.

Let's take a look at them below:

  1. Family & Friends: It may seem obvious, but to approach friends and family can be a great way to fund your startup; you will not have a serious creditor or investor hanging over your head and can quickly gain access to funds. There is more freedom with this option than most others. You won't need to explain all of your managerial choices in most cases, and often friends and family will be happy to support your project in any way they can as long as the investment amount is reasonable.

    One of the difficulties of approaching friends and family is the rarity and difficulty of raising over $100,000. Not to mention the personal issues which can arise from mixing business with friendship. All investments, even from family, should be documented in writing. There must be an understanding that no investment is a sure thing and that there is a chance the investment might not be returned if the project fails. Of course, if it succeeds, then your friends and family will share in the profits which might offset this concern.
     

  2. Angel Investment: An angel investor provides capital for a startup in return for either equity or convertible debt. Often, such individuals are contacted during a second round of investment after family and friends have been approached. They can provide more lucrative investments, sustaining a business before moving on to more substantial sources such as venture capital. Angel investors use their own funds and are most commonly involved either at the seed stage of a startup to help the business find its feet, or during difficult times when cash flow is an issue.
     

While this form of investment is perfectly valid, you should consider some of the implications of going down this route. Angel investors often seek an active role in the startup they are investing in. They also are unlikely to invest more than once unless they see returns in the pipeline, so if you need more than a one-time cash injection, another funding strategy might be preferential.

3. Business Plan Competitions: Often overlooked by startup entrepreneurs, applying to a business plan competition involves submitting your business plan to be judged by a panel against others, with the winning entry receiving some form of funding. Such a panel normally represents a group of investors who are willing to supply capital to those with the most attractive business plan. There are many such events like this worldwide, but the terms of submission must be explicitly followed. A business plan competition might ask for hands on involvement in the startup in return for investment; if this is not something you wish to entertain, then ensure that you are applying for those competitions without such stipulations.
 

There is usually nothing stopping you from applying for as many business plan competitions as you can. If you yourself are not best equipped to create a dazzling plan, then it might be worth hiring someone to do it for you on a one-off basis. This plan can then be submitted to any competition you wish.

4. Accelerator and Incubator Programs: These programs are designed to foster startups during the seed stage for a defined period. Good example of this could be TechStars. This usually occurs over a few months and includes office space, funding, access to B2B or B2C networks, and mentoring. Experienced businesspeople will therefore help shepherd your startup at the beginning and get it off the ground. This is typically done in return for equity in the business.

Working with the right businesspeople can be a valuable opportunity for your project, but it requires careful consideration. While you gain access to the experience and capital of someone who knows how to make a startup a success, this is given in exchange for a permanent stake in the business which many mentors may sell to other parties outside of your control, as soon as a profit presents itself. The emphasis here is often on the quickest turnaround time possible. If you are looking for a co-founder and investment of time then check CoFoundersLab.

5. Bank Loan: Most banks offer loans to small businesses. All that is needed to acquire a loan is a good credit history, a business plan clearly defining costs and how profits will be made, and a well researched overview of the marketplace for your specific product and/or service. If the business already has capital of its own this can hugely help in persuading a bank to approve funds.

As with any loan, there are dangers which should not be overlooked. If a loan is not paid on time then it can put a startup into a precarious position. Any creditor will expect to be repaid the amount owed; if they are not they will consider legal proceedings which could destroy your business. High interest rates can also be an issue, so it’s critical that you try to secure the best deal available before agreeing to take a loan. A credit union may be a better option, as they will provide capital to members for a much lower annual interest.

6. Crowdfunding: There is no doubt that crowdfunding has changed the way fundraising works. By showcasing the concept behind your startup and offering perks in return for money, rewards-based crowdfunding can provide substantial amounts of capital. The greatest advantage here is that it isn't really investment; at least not in the traditional sense. You receive money from those wanting to support your project, but contributors do not hold a stake in the business. They expect to see the project come to fruition, but there is no legal obligation for this to occur. Crowdfunding can attract hundreds of thousands, and in some cases millions, of dollars worth of capital without giving away one single share in the business. Equity-based crowdfunding platforms like 1000 Angels provide a chance to reach a slightly wider pool of investors, but still raise a good chunk of capital in exchange for equity.

There are downsides to crowdfunding, most pertinently in terms of reputation. If you do not bring the startup to a position where it can produce its goods or service, or you do not honor perks/commitments which were traded in return for investment, then your brand and you personally will acquire a toxic reputation. This can negatively affect future ventures and can all but destroy any faith the consumer might have had in your startup. For this reason, crowdfunding should not be entered into lightly.

7. Venture Capital: One of the most desirable forms of investment for a startup is to attract the interest of a venture capital firm. Most VCs represent a pool of investors who are willing to commit substantial amounts of capital to the right project. With a huge amount of available funds and access to expert consultants who will help your business, venture capital groups provide an enticing option to startup entrepreneurs looking for a large round of funding.

Unfortunately, venture capital firms tend to require a big return on their investment. This can be a large portion of profit as well as a substantial stake in the business. Caution must be taken here; if too much equity is given away, you might find yourself out of the decision making process for the startup that you created. Furthermore, venture capital firms stick to rigid guidelines when it comes to due diligence. It can take them months to decide whether or not a startup is worth investing in, so they are not the ideal choice if you are seeking a quick injection of finances.

Which is the Right Investor for Your Startup?

Unless you have access to a high level of personal wealth, securing investment for your startup is a must just like we outlined on our piece discussing thoughts on hustling stating the differences of why some founders win and other loose. Even after a certain period of bootstrapping, there's no other way to get to the next level. Deciding on which type of investor to approach is entirely up to you. They must be the best possible option for your business and your financial situation. Get that decision right and your startup could grow exponentially, from a small project to an internationally renowned brand.


This site is operated by Onevest Corporation. Onevest does not give investment, legal or tax advice. All securities listed herein are offered through North Capital Private Securities Corporation ("NCPS"), a registered broker-dealer, member FINRA/SIPC. Onevest has taken no steps to verify the adequacy, accuracy, or completeness of any information presented herein. By accessing this site and any pages thereof, you agree to be bound by the Terms of Use and Privacy Policy. Only Accredited Investors can invest in securities offerings posted on this website. All accredited investors using the Onevest platform must be verified as to their accredited status and must acknowledge and accept the high risks associated with investing in privately held companies and early-stage ventures. These risks include holding an investment for periods of many months or years with limited ability to resell, and the risk of losing your entire investment. You must have the ability to bear those risks. To the fullest extent permissible by law, neither Onevest nor any of its directors, officers, employees, representatives, affiliates or agents shall have any liability whatsoever arising out of any error or incompleteness of fact or opinion in the presentation or publication of the materials and communication herein.