Choosing Business Investors Is Choosing Your Future Self

When the Deal Terms Distract You from the People Behind Them

The deal looked safe on paper. The investor was taking a minority stake, so there was no question they’d ever be behind the steering wheel—and since we’d set the terms ourselves, I told myself the risk was low. Still, something felt off. The investor’s portfolio looked nothing like my company, and I remember thinking, “We are not like the other animals in the zoo here!” Despite that nagging feeling, I went ahead.

Within one week of closing, the firm asked us to meet with a guy they’d hired to lead another, supposedly complementary venture. He showed up full of questions about how we did things. I asked him directly what he’d been hired to do. “I’ve been hired to create a version of your company that services larger customers,” he said. I ended the meeting on the spot.

It turned out the investment firm had taken our due diligence—including data about our methods—and used it to create another company similar to ours, one that they controlled. To make matters worse, the investment firm had the same people serving on my board and on the board of their new company, our soon-to-be competitor. Board members have a fiduciary duty to the company, so this created a real conflict of interest.

It took years and a change in investor before that chapter closed. It was a valuable lesson in the importance of vetting not only the terms of a deal but also the people involved. I never made that mistake again.

How to Actually Vet a Business Investor

An investor’s track record is the clearest signal of intent you will find. Look at the companies already in their portfolio. Are they similar to yours? What do they do with those companies? Do they typically install their own hand-picked operators to run things, or do they back founders who are well underway? If the pattern doesn’t match how you intend to run your company, that’s a red flag.

Some investors come with their own agenda for your company, and they won’t necessarily announce that up front. Instead of unquestioningly welcoming any and all investment, scrutinize it and dig into the why. Ask, “Why us, specifically?” A vague or generic answer is cause for concern.

Finally, know yourself and trust your gut. If something feels off, it usually is, even if you can’t articulate why. In my case, I felt something was amiss but went ahead anyway. It was only after the deal closed that it became obvious the investor’s goals didn’t align with mine. The ups and downs of that experience taught me that an aligned partner is just as important as favorable terms when choosing business investors.

Finding the right fit can take time. Between 2007 and 2013, I met with about ten different investment firms interested in my company, but none shared my vision. I kept looking. Eventually, I found investors willing to take a minority stake who also fully respected the company’s objectives. That relationship became one of the best partnerships I’ve ever had.

Choosing Business Investors? Choose Wisely

Vetting for alignment is one of the most important pieces of due diligence you will do. Investors will always have their own goals, whether or not those goals are stated up front. When choosing business investors, you want people who genuinely believe in your mission, not people who just say they do. Finding them takes patience, and sometimes a few hard lessons. But it’s worth every bit of scrutiny it takes to get it right.