If you are an entrepreneur that is looking for investment capital to grow your startup, it is easy to get excited when a potential investor asks for your business plan. And why not? This angel investor or venture capitalist may be able to provide just what you need to make your dream a reality.
Before you get too excited, take a breath. Bear in mind that you are intending to enter into a business relationship with an investor and just as you would qualify any potential business partner it is also important to qualify your investor. There are several things to consider before you start handing over the requested documents like your business plan, financial statements, etc.
Were you referred? If they were recommended to you by someone you trust or are a known investor in your region, chances are they are a reputable investor. Even so, take precautions -- read on.
Do the research. You need to do your own due diligence to be certain that you are dealing with a reputable investor. What are the steps you can take to do this?
- Ask the investors to provide their information first. Ask about their business including their full contact information and physical address. Have them tell you about their investment interests, process, and expectations.
- Verify the legitimacy of the financial organization. Try contacting the Better Business Bureau (www.bbb.org) or the Federal Trade Commission (www.ftc.gov) about their practice.
- Request references of people they have invested in previously, and then call these references to discuss their experience.
- Conduct business with a firm in your own country, especially if you have difficulty verifying the legitimacy of foreign investors. In many cases, though not all, investors want to invest in businesses that are located near them because this allows for better oversight of the investment and relationship.
- Never provide personal information before receiving paperwork or pay upfront for a loan application review.
- As you begin to form a relationship, engage an attorney that is capable of adequately representing your interests.
Know the odds. Did you know that for approximately every 100 business plans that an angel investor gets, they pursue maybe 10 for a further conversation, conduct their own due diligence on 3-4, and invest in 1-2? The odds are small that that investor is going to invest in your business.
Protect your secret sauce. Most investors will not sign a NDA initially since they typically will pull in subject matter experts to consult during due diligence. If you are going to provide them documentation on your business, you need to be prepared to share the essence of your idea without giving away the secret to what makes it so special. Down the road, when both parties are confident that things will move forward, a NDA can be revisited.
Get it in writing. Any reputable investor will be willing to put what they are offering in writing. Do not accept a verbal offer.
Though there are fraudulent investors, do your best to not get discouraged. There are many legitimate financial sources available for starting your business. Explore your options and take your time. Whatever you do, don't allow any investor to pressure you into committing to an investment before you are certain of their legitimacy.
These tips are not intended to be comprehensive, but merely serve as a guideline.
Other websites that can help you:
Tiffan is the Vice President of IdeaCrossing, a free online community created by JumpStart, which connects entrepreneurs with the national resources necessary to grow their businesses. Tiffan has worked at several venture-backed startup technology companies and strategic marketing agencies in both Boston and Cleveland. Through her work, she has facilitated the necessary growth of early-stage companies.