Just as all friends and business associates are not the same, the relationship that you have with investors will vary considerably. Some investors are more than willing to play a silent role in your venture and stand by idly while you deliver reports or infrequent meetings. Others take a much more engaging role that ranges from micro-managing to providing you general access to their resource base. It is important to understand the degree of engagement that investors expect and the value that they deliver in order to generate the most value out of the relationship. This article attempts to generalize the various investment relationship types based on our encounters. Its purpose is to help companies understand that not all investors are the same and that by understanding their needs, you may select the optimum financier to partner with.
The Silent Type
This classification is advantageous for hands off style investments where the entrepreneur is extremely well experienced and connected, or the investor is inexperienced in a certain area. It is the simplest relationship where the money is provided, returns are collected and the basis of the relationship ends there. Updates are expected, particularly if unanticipated events occur that may alter the returns, but not burdening communication. Many investors actually prefer distance within this relationship as their area of expertise and resources may be misaligned with the target company or they may be engaged in other activities that demand more attention.
There is a negative association with the term ‘micromanager, as images of the word may apply to low skilled workers or poor management. The micromanagement type is not necessary bad, particularly for companies that are lacking in a particular area. A software company that only has an engineering team may benefit from an experienced manager/investor that can provide guidance on growth. Similarly, a struggling company in a turnaround situation may improve performance if an experienced turnaround specialist placed money and micromanages her investment. However, the relationships may be disadvantageous if an investor has poor management skills or misaligned industry experience. An investor the placed money into a biotechnology firm, but only has experience in natural resource extraction may be a poor match.
Strategic Advisor Type
This relationship may be the best for well-seasoned rounded management teams that would like additional advisory and partnership opportunities. A good strategic partnership can immediately generate strong returns for investors and the team. However, many partnerships may only be formed through personal relationships and professional connections. An investor that has extensive industry experience maneuvering a company towards successful exits and establishing relationships necessary to achieve it, may be a strong connection.
Toxic investors may be avoided by performing proper due diligence. We have heard horror stories of companies used by investors as mediums other than what was agreed upon. For instance, they were listed on a stock exchange in order to yield quick profits and dump the stock. The toxic type is not limited to fraud, but can apply to any type where the investor does more harm than good. It may be misleading to be tempted by easy money, but research should be performed and logic should not trump emotions when performing research on investors. Investigate previous deals that they have funded, the relationship with the management team, and overall performance of their portfolio.