Finding an investor (or investors) for your startup may seem like a coup, but you should take a moment before you jump at the opportunity. Not all investors are equal - and working with the wrong investor could spell doom for your business. To make sure that you choose to work with the right investor - especially if you have several different investors lined up - you need to do your due diligence. The following are a few tips on performing due diligence on your potential investors:
Tell the investor
There's no point in trying to do it secretively. A good investor will understand that you will want to perform due diligence. In fact, there's a good chance that they will even help you out. An investor that is confident that your due diligence will only help their case will provide you with resources and people to speak with, thereby making the process quicker and easier for you. Of course, if an investor isn't happy that you've decided to do due diligence, then they most likely have something to hide, which means you should be very wary about working with them.
Do some basic online research
The bigger a presence that your investor has online, the more legitimate they most likely are. An investor that cannot be found online is a huge risk. Check the major social media channels to see if the investor has any kind of social presence. Do they interact with other investors and entrepreneurs online? Are they doing so in a positive manner, such as by offering friendly advice to followers? Check out their personal site as well. A good investor will have a personal or business website that offers a wealth of information. In addition to all of that, do a basic Google search to find out if there are any articles about them. Are they positive articles, such as success stories or stories about community involvement, or are they negative articles that involve some sort of controversy?
Look into their business and financial status
Find out how much experience the investor has within the industry your startup belongs. Check to see if they've made any successful investments - if all of the startups they invested in have failed, that's probably not a good sign. You'll also want to see where their funding is coming from - avoid investors that get their money from offshore sources. Last but not least, do a routine credit and criminal check. You don't want to work with an investor with a history of scams or that is in massive amounts of debt, for obvious reasons.
Speak with entrepreneurs the investor has worked with
Find out about the other startups that the investor worked with. Speak with the entrepreneurs behind those startups and ask about their working relationship. Find out if there were any issues, such as disagreements over the direction of the startup or its funding. It's a good idea to try and meet with these entrepreneurs in person instead of just speaking with them over the phone. This way, you'll get a more in-depth response.
Speak with other investors
Get into contact with other investors in your area. There's a good chance they know the investor you're speaking with - if not on a personal basis, then by reputation. They should be able to shed some light on the investor's reputation within the industry.
Before you begin working with an investor, make sure that you perform due diligence using these tips to ensure that the investor is a good and reputable match for your startup.