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9.5 Conduct Your Review of the Investor
It's hard to resist an investor who is willing to inject capital into
your business. But the risks of being associated with an incompatible
partner can quickly be outweighed by any benefits. So before you sign
the deal, whether you're courting one investor or several, you owe it
to your business to take one last objective look at your partner-to-be.
Many entrepreneurs look only at the amount of money an investor is
offering, but it's just as important to consider the investor's contacts,
experience and expertise. If your business does encounter difficulty,
an experienced, committed investor-partner could make the difference
between success and failure.
Issues for Your Due Diligence Review
Look over the following checklist - it contains a list of issues you should
consider when assessing the prospective investor. Think of it as your due
diligence review. Do some investigation and analysis on each of the items and
rank your comfort level with the investor on each of them.
Scale
1. uncomfortable 2. somewhat uncomfortable 3. comfortable 4. very comfortable
What to Check Out |
Based on what you learn, how comfortable do you feel
about the investor?
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Honesty and Integrity
Can you trust this person to keep his or her word and honour verbal
commitments? Will you need signed contracts for every matter?
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Past Track Record
Is this person usually involved with successes or failures?
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Typical Investment Philosophy
Will this person be an active or a passive investor?
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Size
Does the investor have sufficient capital to provide you with a
second round of financing if you need it in the future?
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Stability
Has the investor been in business for a long time and, if so, what
is included in the investment portfolio? Is the investor financially
stable? If the investor goes bankrupt, your financing may belong
to one of the creditors, who may not share the investor's enthusiasm
for your business.
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Expertise and Experience
Does the investor have industry expertise related to your business?
Will the investor be a useful addition to your board of directors?
Does the investor have management skills that compensate for weaknesses
in your current management team?
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Network
Does the investor have a large network of contacts that you can
use to find management expertise, potential customers, or suppliers?
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Problem Investments
What does the investor normally do with investments that underperform?
Does this person exit from the financing arrangement, take over
the company or arrange to work it out with the entrepreneur?
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Personality
Is this investor someone you feel comfortable working with?
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References
What do other businesses, bankers, business associates, financial
newspapers, magazines and your own business advisors have to say
about this investor?
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Other
Investigate any additional factors that are important to you and
your business.
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