For fledgling startups generating a good amount of attention and interest, embarking on a fundraising round may bring out some prospective investors with less than ideal backgrounds and performances. With the meteoric success of more than a handful of startups over the last decade, investors from an array of industries are keen on bankrolling the next big thing. Unfortunately, this may mean that investors with rather questionable past dealings will try to get in on the action. Here is how to avoid dangerous and shady investors:
Do Your Research
Engaging in some form of investor due diligence is imperative before any startup accepts an infusion of capital. Regardless of whether the startup initiates contact with an investor or the investor reaches out on its own accord, the startup founders owe it to themselves and the business to ensure that pursuing any sort of negotiations will be worthwhile. In addition to gleaning information online, it is a good idea to consider running some concrete searches, such as with the SEC or other governing institutions or bodies. Hopefully, there will also be an opportunity for startup leaders to make a direct inquiry. For any investors unwilling to commit to transparency, this may be a sign to seek funds elsewhere.
Get to Know Each Other
Before getting into any serious negotiations, there should be some kind of introductory period during which both parties can get to know the other side a bit better. This may or may not be a formal process, essentially a kind of mini due diligence, or it may be fairly casual. It will depend on the company cultures, industry norms, and really the amount of money potentially at stake. The thing to remember is that a startup seeking funding should have an equal chance to learn about potential funding partners. Just because a startup needs money to grow doesn't mean it should take a check from just anyone. Investors backing a business can have a tremendous impact on the business's trajectory and thus has to be reputable.
Share Information Cautiously
Startups will be eager to get things going as soon and as quickly as possible, but information sharing has to be done cautiously. Prospective investors can't just have unfettered access to the company's records and financials. One of the smartest decisions any startup can make is setting up a virtual data room. This will allow for safe, secure document uploads and sharing and only those with a real need to know should be granted access. Emailing attachments or relying on an unsecure solution to save and share information will place countless valuable documents at risk, and it may be impossible to prevent misappropriation or wrongdoing. With a virtual data room, documents can be safely stored in a central repository protected by stringent security features, such as multi-level authentication and advanced encryption.
Startups cannot assume that just any virtual data room will suffice. It is important to select a purpose-built solution that has appropriate safeguards within the system, particularly permissions-based role assignments, document watermarking, and disabled printing. These additional security measures ensure that the information stored within the data room remains protected, that it is clear who owns what, and that only those who have been vetted are allowed to enter and view the data room's contents. For any startups seeking funding that have valuable intellectual property, these safeguards may prove vital in protecting data from any unscrupulous parties.
Even after researching and getting to know a prospective investor, startup founders cannot let their guard down. When people are eager to close a deal, they may succumb to ignorance or a false sense of security, and this is when careless and potentially costly mistakes can occur. Through all phases of the fundraising process, someone has to stay on top of company documentation and must monitor the activity occurring within the virtual data room to ensure there is nothing untoward happening. Fortunately, a data room makes it easier to keep a handle on everything, as it should track and record activity and archive these data logs.