By Jason Reading
Many entrepreneurs struggle with the process of finding a good capital partner. As if nailing the perfect pitch and generating investor interest wasn’t enough work, there are a host of considerations when evaluating potential partners beyond just valuation and finances.
For better or worse, joining forces with a partner is a form of marriage. It’s important to spend the time upfront to ensure that your values, priorities, and expectations are aligned. Making a smart capital partner decision requires asking the right questions. Here are a few area to be explored when evaluating a potential partner.
1. Where Does the Money Come From?
Understanding the investor’s source of capital is extremely important given its impact on the dynamics of the overall investment relationship and everyone’s expectations. Do investment dollars originate from a small set of partners or a larger group? Is it find-based capital? There are variations within all types of capital sources. Some sources of capital are much more patient than others. Make sure your needs align with the source of capital.
2. What is Their Track Record?
It seems obvious, but understanding a potential capital partner’s previous investments and overall business trajectory is important and surprisingly often overlooked. The types of investments, business engagements, and overall history as an investment entity can be an important indicator of what to expect and provide a feel for the nature of the potential partner.
3. What About Their Team?
Most potential capital partners will heavily scrutinize the quality and experience of your management team. As an entrepreneur, you should apply that same rigorous review to the team of your potential partner. Knowing as much as possible about the investment team and their strengths and capabilities is critical.
4. What Can This Partner Provide Beyond Funding?
A strong capital partner provides much more than just money. A partner should have a diverse and high-quality network of contacts. Whether it’s locating a resource to address a specific business issue or finding the right expertise on more strategic challenges, there is enormous value in a strong network. Learn what you can about the breadth, depth, and strength of your potential partner’s network.
Some capital partners also provide high-caliber in-house resources in IT, marketing, operations or other functional areas. Learn if these resources are available to you and how they could be applied to your business.
5. Do They Have Industry-Specific Expertise?
Specific knowledge and experience in your industry is certainly not a requirement for a capital partner, but it can be a valuable asset. A partner with industry knowledge will more quickly understand your positioning in a market and be better able to see potential opportunities. Targeted industry connections and resources can also add significant value to the overall relationship.
6. Are They Flexible?
Every business, entrepreneur, and investment is unique and requires a creative, open approach to be successful. Get a feel for flexibility by collaborating on how an actual deal might come
together and how subsequent business changes might be handled.
7. Do You Like Them?
A good business relationship is a personal relationship. We all know how important positive rapport can be when it comes time to deal with the inevitable bumps in the road. Find a partner you enjoy working with and who you believe is a excited to work with you. Likability on both sides of a partnership can make a partnership more effective and enjoyable.
8. Are They Excited About Your Business?
Do you sense genuine excitement about your team and business from the potential investors? Capital partners don’t need to be wildly excited about your business to be a good fit, but as an
element of the overall relationship, it can play a positive role if your investment partner is passionate about your business.
9. Are You Clear on Priorities and Expectations?
To effectively evaluate the answers to these questions and provide the right context for your capital search, it’s critical to have a clear vision of your business and personal objectives.
Beyond investment dollars, where are your most significant areas of need or interest? How active or passive would you like your ideal partner to be? What would you like the day-to-day engagement to look like? How would you like to handle reporting and communication? No investment partner will be equally strong in all areas, but a clear understanding of your priorities is key to effectively evaluating all of your options and making the best decision.
Ultimately, it’s all about finding the best overall fi t. The right partner can create an enormous multiplier effect on the success of your business. Like pursuing any long-term relationship, you will need to spend the time, ask the hard questions, and be selective. It could be one of the most important choices you ever make.
Prior to forming Aries Capital Partners with Rick Durham and Andy Dent, Jason Reading worked as a partner at Peterson Partners. He has served on a variety of boards for portfolio companies. A licensed CPA and CMA, Jason holds an MBA from Harvard and a Bachelor’s in accountancy from Brigham Young University. Jason was also a major in the Army National Guard and served a one-year tour of duty as a company commander.