Insights

Is There Such A Thing As A Bad Investor? Part 2

Friday 26 August 2022

A couple of weeks ago on the Extraordinary Entrepreneurs Together podcast, we were joined by EHE’s very own Elliot Smith and Pete Evison to discuss the difference between good and bad investors.

This is the second part of what will be a three-part series, so stay tuned for the grand finale in the coming weeks!

 

This week, we were joined by Gary Fletcher, EHE Director and Founder, and Ross Faith, EHE Chief Financial Officer, to discuss how their personal experience as entrepreneurs has shaped their ideas about what to look for in an investor. This is the second part of what will be a three-part series, so stay tuned for the grand finale in the coming weeks!

 

What is a bad investor?

 

Is there such a thing as a bad investor? 

 

Gary: “Fifteen or twenty years ago I may have answered no, because all I was looking for was the money, but with twenty years of experience the answer is a resounding yes. We want to help entrepreneurs understand that it isn’t just about the money – you can really hamstring your business and your life and ruin it if you get the wrong investor.”

 

So, what should entrepreneurs be looking for in a good investor?

 

What’s your sweet spot?

 

This is the classic first question that any entrepreneur should put to a potential investor. If you’re looking for an injection of £2 million, you need to approach investors who make offers in and around that figure – let’s say between £500,000 and £5 million. Don’t waste time buttering up investors who are outside of your range.

 

It’s important to bear in mind here that selling equity isn’t the only way to raise money. There are other options you can look into, including bank debt. The crucial thing is not to give too much away in the early stages. The less equity you part with, the better, because there’s a good chance you’ll have to give up more in future funding rounds.

 

Where are you in your investment cycle?

 

Once you’ve found the investor’s sweet spot, this is the next big question to put to them.

 

Just like businesses, investors go through life cycles. Typically, they raise a pot of money, then spend it over a period of five or so years. When this period is up, they pause and reassess before starting a new cycle. If you receive investment towards the end of one of these cycles, you may find that your investor does not have a long-term commitment to you and your business.

 

Gary: “You’ve got to ask the question: ‘Where are you in your investment cycle?’ And don’t believe the answer. Whatever they tell you, go out and find the answer yourself. Ask people in the industry, check online, find out what the truth is. If they say they’ve just raised £200 million, when did they actually raise that money?”

 

Do you buy into my vision?

 

Balance sheets and financial projections are important, but if an investor focuses too much on them at the expense of the rest of your business, it can be a red flag. You’ve got an innovative, untested idea, the value of which might not be recognised by the current market – your investors should be as excited about that potential as you are!

 

Gary: “Do they buy into your vision? Or are they only interested in a spreadsheet? If they don’t believe that you, your management team and your product have special qualities, it can be really challenging. It’s almost a gut feel for the entrepreneur. Do I get on with these people? Do I trust them? Do I like these people?”

 

An investment is just the beginning of a long-term relationship, and it needs to work on a personal as well as a professional level.

 

What role will you take in my business?

 

Or, to put it another way, how much will my investors try to interfere? As Gary explained, there’s a decisive way to test this: does the investor try to appoint themselves as chairperson; or do they look to appoint an independent non-executive director with relevant experience in the sector?

 

Gary: “If they appoint themselves as chair, they are absolutely going to interfere, because they think they know the business and they can direct it. If so, you’ve got a real problem. If they want to appoint an independent chair with sectoral experience, and you have input in the appointment, then that says everything. They’re trying to help and support you, rather than direct and channel you.

 

The role of an investor is to offer cash, expertise and support. It should be you as the entrepreneur who provides strategic direction, leadership and vision.

 

Ross: “An entrepreneur should be a leader. It’s their business model, their financial plan. I’ve seen some investors try to interfere by saying, ‘You’ve got your numbers wrong, you need to do this, you need to take that out.’ That’s just wrong.”

 

Always be prepared to walk away

 

Finally, the question that all entrepreneurs need to ask themselves: if something about a deal feels wrong, am I brave and confident enough to walk away? If you’re not prepared to walk away – even at the risk of losing everything – then you’ve got no leverage in the deal. All the power is with the investor. On the other hand, sometimes just the threat of walking away can be enough to turn a bad deal into a good one.

 

Gary: “You’ve got to be prepared to stick to your guns, otherwise you’re basically at their beck and call all the time. You’ve got to stand up to them. It’s a game and you’ve got to have strong belief, and call people’s bluffs, because it’s your business on the line.

 

A match made in heaven

 

For established businesses with a robust turnover, investment advice can always be purchased at a premium. For early-stage startups, however, that kind of guidance isn’t so readily available. This is where EHE comes in, offering younger businesses the insights and support they need in order to decide if a particular investor is right for them.

 

Entrepreneurs who partner with us get the benefit of an in-depth matching process, based on a deep understanding of the businesses and investors who join our community. If you’re looking for £5 million, we’ll only match you with investors who can contribute that sum, saving you weeks of legwork, not to mention the associated stress and uncertainty. We’ll also help you find investors who fit your vision, both in terms of experience in the sector and personal values.

 

Crucially, everything we do is geared towards allowing entrepreneurs to grow their business as rapidly as possible.

 

Ross: “We’re not trying to load our entrepreneurs with lots of upfront costs. Everything’s aligned with our fast-growth philosophy. Our whole team will provide our time and our experience. We’ll show you how we got our scars, to make sure you don’t walk into the same pitfalls.”

 

To find out more about the difference between good and bad investors, you should check out our other podcasts and blogs, or join our community to get involved in the discussion. If you’ve got an urgent question about investment in your business, drop us a line today to find out what EHE can do to support you in your journey to entrepreneurial success.

 

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