How To Spot An Investor Who Adds Value To A Company

How to spot an investor who adds value to a company? Why is this important? Founders today are well aware of the importance of having strategic partners on board when building a company. You need people at the table who are as committed to its long-term success and profitability.

Particularly, you need entities that stand to profit and expect to make rich returns when the company accelerates. Angels, venture capitalists, and impact investors have a vested interest in supporting you with capital. But, you’ll need more–a value-add investor.

A value-add investor brings sector-specific expertise, in-depth knowledge, strategic connections, and operational know-how, along with access to networks. They can help you hire top talent and steer the company toward assured growth, ensuring you achieve its core objectives.

But not all investors operate in the same way. In fact, over 90% of venture capitalists bring no value to the startups they invest in. Worse, 70% to 80% may also hurt them by dragging them down and stagnating their growth. To the point that founders are now beginning to ask a crucial question.

Would it be advisable not to bring in investors as opposed to investors who are likely to be liabilities? How to spot an investor who adds value to a company? How would you discern a value-add investor from a potential liability? Read ahead to understand how.

Core Areas Where You Could Use Experience and Expertise

Regardless of whether you’re a first-time or repeat founder, you could use expertise in several of the company’s core areas. Some of the typical high-value add-ons that investors bring include:

• Introductions to other investors within their network who can provide capital and additional support. You can also expect guidance with structuring subsequent funding rounds.
• Enabling communications with experienced executives who can join the company’s board as advisors. These members can provide strategic guidance and valuable mentoring.
• Connecting you with potential partners in supply and distribution chains, such as vendors, suppliers, marketers, advertisers, logistics, and more.
• Assisting in generating and increasing revenues by building connections with potential buyers and licensing opportunities
• Streamlining business growth by enabling joint venture partnerships and, later, mergers and acquisitions.
• Recommending top professionals who can assist with legal, accounting, advisory, and taxation matters.
• Sharing insights and experience gained from working with other startups in the same or similar sectors at comparable growth stages.
• Offering unbiased and third-party perspectives to promote business growth and development.
• Assisting in building stronger investor and shareholder relationships through transparency and open lines of communication.
• Guiding board meetings toward productivity and informed business decisions driven by robust metrics and analytics.
• Assisting in identifying and recruiting top talent for senior roles to enhance the company’s performance.

How to Spot an Investor Who Adds Value to a Company?

Conducting reverse due diligence on investors is a crucial step when building a list of potential capital sources to approach. Your research will reveal several key indicators suggesting whether the investor is a good fit and can effectively meet your needs.

Here are the questions to ask when evaluating them.

Will the Investor Support the Company Beyond Its Early Stages?

Why is this question pertinent? Not all investors have a high risk tolerance and are unlikely to support your startup beyond its early stages.

• This can pose a problem when you’re looking for a robust lead investor. This entity not only assures you of backing for further funding rounds but also adds credibility to your brand. You need a venture capitalist who will set the tone for future success and scalability with strategic connections.
• Watch out for angels and micro funds who are likely to offer you only small checks. These entities may lack the necessary capital reserves to support later-stage funding. Furthermore, they may not provide the additional expertise you require.
• Look out for low-profile investors who prefer to avoid the limelight or won’t publicize their support for your company. This can be a giant downside when you need visibility for the company by leveraging the big VC names you’ve attracted.
• What you’re looking for are investors who believe in you and your vision and will continue to support the startup. You need their backing not only in the early stages, but also in the later stages when fresh challenges emerge. For instance, economic downturns or competitors breaking into the sector.

Does the Investor Rely on Social Proof to Make Investment Decisions?

Not all investors are interested in backing startups that emerge on the commercial landscape. They are more content to support follow-on funding rounds that have attracted capital from reputable venture funds. This strategy enables them to lower their risk by investing in proven opportunities.

You can’t expect responses from them until you’ve secured funding from credible venture capitalists or private equity firms. Once the company gains momentum and demonstrates revenues and profits, you can expect them to jump onto the bandwagon.

These investors support your brand not because of their conviction in its success. But because of the FOMO or fear of missing out on a viable opportunity that can deliver rich returns. When examining the pitch, their primary attention is on the lead investor and other entities who supported the seed round.

Then some investors prefer to back companies built around existing ideas that have made it big. For instance, business models that mimic successful companies like Stripe, Slack, Shopify, Uber, or ChatGPT. These investors may be hesitant to back innovative ideas that could disrupt the industry.

Keep in mind that storytelling is everything in fundraising. In this regard, for a winning pitch deck to help you here, take a look at the template created by Peter Thiel, Silicon Valley legend (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that founders worldwide are using to raise millions below.

Will the Investor Accelerate or Stunt Company Growth?

When you’re looking for signals for how to spot an investor who adds value to a company, examine how they operate. Some investors are eager to accelerate growth and provide you with the resources to propel it forward. Others may create unexpected hurdles that hamper growth.

• The term sheet should give you a fair overview of the extent of control the investor expects. Look for provisions such as one or more board seats, unfair voting rights, veto rights, and other unfavorable clauses. Your legal advisors can help you detect these clauses and avoid signing a dirty term sheet. Such term sheets can contain restrictions on entering into strategic mergers or acquisitions, raising follow-on capital, or leaver clauses. They may also enable investors to veto decisions regarding pivoting or allowing the founder to exit with fair and equitable compensation.
• If you’re including investors in the decision-making process, ensure that they have the necessary sector-specific expertise. Investors may push you to integrate technology, such as AI or cryptocurrency, that may not align with the company’s core vision. Inappropriate and premature technical adoption can create unnecessary hurdles in its operations, not to mention inadvisable pivots.
• You should also be wary of investors who are likely to push for a premature acquisition deal. Or insist on taking the company public with an initial public offering (IPO). If investors focus on operational shortcuts, emphasizing quick returns over sustained growth, that’s a signal. It indicates that they are focused on a short investment horizon and want to make a quick exit. Their fund lifecycle could also be a factor at play here.
• Compromising on product development and high-quality features results in eroded brand value and a damaged company reputation. Don’t let that happen. It signals that the investors prioritize gains over adding value to the company.

What Does Investor Psychology Look Like?

When approaching investors, remember that the venture capitalist fund or private equity firm has humans making key decisions. These decisions are based on core investment policies and objectives, and substantial profits are just one of them.

• Top funds have reputations to protect and want to be perceived as knowledgeable investors who identify and back unicorns. Many general partners (GPs) want their firms to be associated with leading projects that are considered disruptive in the startup ecosystem. Returns are not a high priority for them.
• You should be wary of investors who insist on decisions even if they are not in the company’s best interests. The underlying goal is to assert authority and control without any real expertise to back it. Learn to recognize these dynamics so you can filter their directives and feedback. You’ll accept only those recommendations that will actually benefit the company.

What Does the Investor Approval Process Look Like?

When raising a funding round, you’ll likely time it around the runway you have left. A typical raise typically takes around six months to complete, and you need to receive investor responses quickly. It can be either affirmative or negative, but it allows you to approach alternative sources of capital.

An essential aspect of how to spot an investor who adds value to a company is connecting with entities that understand the urgency. Select investors who run efficient due diligence processes and won’t schedule multiple meetings unless they are ready to invest.

You’re looking for people who make quick decisions either way and give you adequate time to complete the campaign. Steer clear of firms and funds that use delay tactics and won’t give you a definitive answer. If the delay is too long, it’s safe to assume the answer is “no.”

Investors should appreciate the time and resources you’re dedicating to running the campaign. Regardless of the amount you’re looking to raise, each campaign requires effort and bandwidth that takes away from growing the company. Your ask could be as low as $500K, or as high as $5M.

Investors get hundreds, if not thousands, of pitches each day, out of which they select a scarce few with potential. They are essentially looking for the next unicorn that can deliver substantial returns. That’s how they offset the losses they invariably carry.

Up to 75% of VC-backed companies fail to return the capital or eventually go bankrupt. This is also why investors sometimes back high-risk ventures with disruptive ideas. However, they are also willing to go the extra mile to help it succeed and drive profits.

If you’re looking for additional information about how to find investors for your startup, check out this video I have created. You’ll find in-depth advice that can be invaluable.

What Does the Investor Portfolio Look Like?

Every venture capital fund or private equity firm has multiple ongoing projects in its portfolio. For a founder, their startup is a top priority–not so for investors. You could be vying for attention, resources, and assistance with around 20 other companies.

Investors may provide small checks to multiple startups to participate in their returns. But they may not have the time or bandwidth to offer more than that. You’re looking for funds that can assign a dedicated representative to the board and provide assistance when it’s needed.

If the firm is backing too many companies, it could be stretched too thin to offer more. A practical strategy is to connect informally with the companies in the investor’s portfolio. Ask for information about the founder’s experiences with the investor before making a decision to approach them.

Will the Investors Deliver on Their Promises?

During the negotiation process, investors may commit to opening doors to opportunities and making perks available to you. They may create hype around the investment deal with press interviews and predictions of a long-term partnership. Others may release projections of significant profits.

The real crunch comes afterward when it’s time to deliver on those commitments. Can you be certain that you’ll receive the introductions and recommendations they promised? Will they assist you in entering into partnerships and support follow-on funding deals?

Before We Sign Off

Building a company without investor capital and resources is exceptionally challenging. However, you need to view this capital as fuel–essential but selected carefully. Conduct thorough due diligence on investors before approaching them.

Remember that you’re selling your startup’s potential and equity, and it has to go to the best bidder. Create a compelling narrative around robust metrics that impresses with its bold vision and mission statement.

Don’t be afraid to demonstrate risks, because investors are drawn to disruptive and courageous ideas that come from outside the box. Most importantly, review the term sheet thoroughly before accepting the conditions.

You’re looking for supporters who believe in the startup and its founder, and are not just focusing on spreadsheets and numbers.

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