How to Choose an Investor for Your Small Business (2024)

By Tomer Michaeli

We often discuss different ways to get your business funded, but a fundamental aspect of getting funded is finding the right investor for your business. In this blog, I’m going to touch on some of the considerations I’ve found important when choosing an investor.

Do Your Due Diligence

I’m always amazed with how little thought entrepreneurs give to who their investors are, what their interests are, or how they make decisions. This is especially true when it is compared with the effort most investors put into their due diligence before making an investment or a loan. I’m aware it is often the case that you may not have the privilege of choosing amongst investors, nevertheless you must still be aware who is it you’re going to bed with.

No matter whether your investor is – a government agency, a bank or a venture capital firm – every investor has an investment philosophy that you should understand. Investors, very much like entrepreneurs, have investors of their own, business models, and differentiation challenges. These factors are some of the drivers of their strategies and therefore should be understood by entrepreneurs.

Some questions to ask include:

• Is the investor looking for a multiple on his investment or for absolute return?
• Is he or she going to spend time helping you with advice and mentoring?
• What are the investor’s strengths and weaknesses?
• What is the investment track record?

You should only let an investor in after you’ve done some due diligence on them and decided that he is the right one for your company, your business plan, your business model and your experience.

Conduct Thorough Internet Research

Internet research is fast and inexpensive and can save you a headache in the future. Websites such as Angel Capital Association and thefunded have good coverage of business angels who are interested in tech companies.

Another option is to talk to someone who worked with the investor. Ideally, you should contact this person yourself to avoid biases, but if you can’t, ask your investor for a reference. Knowing how the investor behaves in different situations, personally as well as professionally, can shed a lot of light on what you can expect down the road. Make sure you talk to people who did, and didn’t, get an investment from the investor – you’ll be surprised how many times, contrary to what you believe, the opinions regarding the investor will not correlate with what you expect it to be.

Align Your Interests

Look for alignment of interests with your investor. This means that you need to make sure the investor is thinking of the business in the same terms as you do from many aspects. Some questions to ask include:

• Is the investor here for the long run or only for a short ride?
• How will the investor behave when the business is in a tight spot and needs a little more money to get back on its feet?
• Will the investor be willing to invest more when the business will grow?
• Will the investor agree to bring additional investors on board if he or she can’t or just doesn’t want to support you any longer?

Every business faces dilemmas and challenges. When a business is standing in a critical crossroad, the chances that both the business owner and the investor will undergo similar thought processes and will come up with similar solutions to the crisis are much higher when their interests are aligned. Misalignment increases the chances that each side will try to take advantage of the other, at the expense of the business’ chances of survival or just hurting its potential success.

Find an Investor Who Understands Your Business

Many investors can offer you much more than their money. Sure, you can always look for a mentor, but if you can find an investor who is also a mentor, you have hit the jackpot. There are also several practical reasons why it’s better to find an investor who understands your business. First, an investor who understands your market is more likely to invest in the first place, for such a market is his or her comfort zone. Second, if such an investor is reluctant to invest this may be a good indication that some aspects of your business plan should be reviewed.

Keep in mind that some people who have been in an industry for a long time might be less receptive to new ideas, so don’t be discouraged if an investor decides not to invest. However, even if such an investor turns you down, don’t miss this great opportunity to get a candid and insightful feedback from an industry expert. Finally, investors who understands your industry can help you in almost every aspect of running your business: fundraising, marketing strategy, finding customers, defining product roadmaps and creating partnerships to name a few.

Do you have any other tips for choosing investors? Share them in the comments below.