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Whose Money Should I Accept? Selecting The Right Funder!

Whose Money Should I Accept? Selecting The Right Funder!

I just had an interesting call with a founder. This was a startup I had angel invested a small amount of money in a few months ago. The company’s doing very well and they’re now ready to raise the next round of funding. They have multiple options, because they’re in a hot space; they have a clever product; and getting traction.

There are now two different funders who want to give them money to help them to grow. One is an angel network, and the other is a VC fund.

He called me up, and said, “Doc, what should I do? Who should I take the money from?” My answer was, “All I can do is provide you with guidance, and discuss the pros and cons of both, but the problem with people who generalise is that they generally tell lies. This is your company, and you need to find the answer for yourself – you cannot depend on someone else.”

This is part of the job description of the CEO – to navigate terrain which he has not done before. He needed to learn on the job, and he was doing all the right things. He was calling up 10 different people, asking them for advice, listening to what they had to say, but he was a smart cookie and he know he needed to discover the right answer for himself.

I gave him some basic guidelines. ” You need to read a lot about this topic, so you understand what has worked in the past for others, and what hasn’t. Other people have dealt with a similar problem before, and you can tap into their intelligence by reading their books and blogs. While reading alone will not give you the answer, by understanding the experience of other founders, you will be able to ask more intelligent questions. Post your question on Quora, and you’ll get some invaluable insights”.

He was in a great situation, and he needed to make the most of the fact that he was in a sweet spot, where people were vying to give him their money. His best option was to set up a competition between the two funders, so he could figure out who would give him a better deal!

I warned him that it’s not just a question of what the valuation is – it’s far more important that the chemistry was right. Whoever funds you will be your lifelong partner, and you don’t want to get married to someone who’s going to give you a hard time. You need to focus on someone who will understand what your strengths are; who will help you navigate the problems you’re going to encounter; and who can show that they can help you scale up and grow.

When people want to give you money, they often over-promise, but at the end of the day, he needed to be a little skeptical and to read between the lines, so he could figure out whether they were actually going to be able to walk the talk.

There is no simple answer because each situation is unique. So much depends upon the kind of person who is giving you the money; what their values are; and where their company is in its own life cycle.

Because so much depends on the chemistry between the funder and the entrepreneur , he needed to do his due diligence on the funders, and then choose the person who works best for them.

I told him, “Take these guys out for dinner separately. Interviewing them will make you smarter, and help you to ask better questions . Why not ask them point blank – Why should I select you over the others ? The quality of their answer will tell you a lot about the kind of person you are dealing with !”

Note: The views and opinions expressed are solely those of the author and does not necessarily reflect the views held by Inc42, its creators or employees. Inc42 is not responsible for the accuracy of any of the information supplied by guest bloggers.

Author

Aniruddha is Director at Solidarity Investment Advisors

Responses
https://inc42.com/resources/simple-legal-contracts-put-business-order/
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