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Like a flood As capital dwindles in the pandemic era, startups must avoid the scarcity trap that comes with a reduced search for investor dollars. And as the markets turn, innovators should remember the basics they learned during the glut.
Investors are pulling back as recession fears grow. In the year In the first quarter of 2022, global venture capital funds fell 19 percent to $143.9 billion from the previous quarter’s record-breaking peak, according to CB Insights.
Whether you’re looking for angel investors to seed your business or backstage backers to help you scale, the partners you choose today will affect your company’s future — from how you run your company day-to-day to your exit strategy. That’s why it’s important to choose well-qualified investors with a track record of how they can act when the chips are down.
It is very important to understand who your partners are. before You let them in the tent. Below, we discuss key issues startups should consider when evaluating investors in the changing landscape.
Kick the tires and get references
Check with potential investors’ portfolio companies, both current and past, to see what their experience is. You need to do this without violating any non-disclosure agreements, but the key question is how investors have fared in previous failures. For example, in the second quarter of 2020, as COVID-19 ravaged the global economy, did you bridge portfolio companies through uncertain times or tell them to find their own money?
During the pandemic, investors at a venture-backed tech company we worked with helped the business manage expenses but initially refused to write checks. They also tried to exercise their right to block other investors from supporting the company, then offered a contract that was significantly lower than what they blocked and tried to take over the company.
Choosing the right partner for the right scale of your business can mean the difference between building a billion dollar company and losing control of the business.
We were able to work with the company to prevent this from happening. But these were sharp-elbowed men, and the company knew in the public domain that information involving those investors should have been known. If you experience these symptoms during your labor, listen up.
So what can you do? Ask around your network (including your lawyers) and the investor’s portfolio to see what kind of reputation an investor or fund has in general and what value they’ve added to the companies they’ve backed. You can also ask for portfolio company reference funds where their investments have not performed.
Talking to the CEO of a company where things haven’t gone as planned can shed light on how an investor can handle difficult situations. Just like everyone else, investors have reputations and tendencies, and this is information available to founders if they care to look for it.
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