Raising investment: Could you spot a Traitor?

Like much of the UK, my Wednesday, Thursday and Friday nights are consumed by the BBC One programme, The Traitors, which centres around ‘Faithfuls’ attempting to track down a group of Traitors who are killing them in the night. The Traitors are hiding in the group, acting as Faithfuls to get away with their murders, in a competition for a monetary prize. Each episode ends with the contestants sat around a dauntingly large round table, accusing one another of being a Traitor and ultimately banishing one person. As a viewer, it is entertaining to watch and laugh at the Faithfuls’ inability to spot any Traitors and instead, banishing one of their own. It seems so obvious – but the difference is we know who the Traitors are. We don’t have a crystal ball in real time, and so we cannot possibly know who is going to stab us in the back, and neither did the Faithfuls when the programme was being filmed.

This is particularly relevant in business when it comes to finding an investor for your company – how do you know who you can trust? Will you look back in years to come and think “how could I not have known, it was so obvious!”, as I am sure many of the Faithfuls think? You have to take the steps now to ensure there is not a Traitor amongst you at your (perhaps much smaller, and less daunting) at your boardroom roundtable.

How to avoid a Traitor

Raising investment for your company is an incredibly important decision. You are giving away a piece of your pie that you’ve poured your blood, sweat and tears into – but often in return for the opportunity to bake a much larger pie. The relationship between a founder and their investor (especially a first investor) is crucial to the success of their business. If you have reached the stage of taking on investment, it is often easy to get carried away and take the first opportunity you are given but remember – there is no mechanism to get out of your investment relationship.

Here are five things to think about when picking your investor, and to keep those Traitors at bay:

Shop around

In an ideal world, you’d find the perfect outfit the moment you enter the shop – but unfortunately it calls for some rummaging around to find the perfect fit. The same applies to your investor, there are so many out there and the more research you do the more likely you are to discover the right one for you and uncover any potential red flags. Some things to think about when shopping around:

• Their expertise and track record – are they an experienced investor with an interest in your industry? Early on you will need to decipher if you would like an investor to provide industry advice and a more hands-on approach as opposed to a more hands-off approach.
• Word of mouth – lots of other businesses that may be at a similar level to you may have experience with investors. It’s worth asking around your network to see if anyone has dealt with those investors that are of interest to you.
• Extensive term sheet – if you get to the stage in discussions where you are given a sheet, it is often considered a red flag if this is too onerous and perhaps filled with surprises. It is always recommended to get advice on a term sheet once you have received them, as although they are not technically legally binding, they do set the tone for the investment going forward.

Conduct thorough due diligence

If you have an interested investor, they are going to be carrying out significant due diligence on you as a company as they will want to know exactly what they are investing in. But this also goes both ways and it doesn’t stop you from doing your own prior research to make sure you are involving the right investor in your business. If there’s anything you want to know – ask them. Sometimes it’s easy to get blindsided by promises, but it’s important to have a list about what’s important to you and to query them on these points. This is a long-term relationship so its crucial to uncover any relevant skeletons in the cupboard as soon as possible, as they will be doing the same on you.

Communication is key

Like many things in life, communication is key. This is no different when relating to your investor so figure out if they value communication as much as you. You don’t want to be waiting for two weeks for a response that you need quickly. As well as this, investors often have to sign legal documentation down the line and an unresponsive investor can often hold up completion. This reverts back to values – you need to have someone on board that respects and values the company’s progression and does not just pick and choose when to be responsive.

Align on terms and expectations

Do they have a genuine interest in your business and industry experience? This means that their views will often align with yours for the good of the business. Often, the investor will have a say in large decisions and so you need someone with similar values. You need to establish that your short – and long-term visions align. This relates back to having to decide if you want a hand on or hands off investor – ultimately you need to decide what is best for your business and ensure all the needs are met.

Unrealistic expectations

Sometimes it is very easy to get sucked into a confident investor promising you the world when sat opposite you at the table. They will know the pressure points to speak on to get a positive reaction from you, and its easy for someone to not speak up as to not rock the boat and put them off. They can paint a pretty picture in your mind, but you need to be able to establish what is realistic and what is not, as the ones that are boasting the most are often the ones asking for the most from you. If something is niggling you in the first instance, this will more than likely develop into a full-blown injury a year or two down the line so make sure you address it.

Even the most experienced of businesspeople can get blindsided by a Traitor – so don’t be hard on yourself if things do not work out exactly as planned. The important thing is to learn from mistakes, and many successful founders will be the first to tell you that mistakes have shaped their successful business.

Recruiting a Traitor isn’t necessarily the end game, but banishment is tricky.