Investing is a very serious activity, both for investors and entrepreneurs: all of them need to scrutinize each other, to consider terms of the deal, to assess all the potential benefits and losses. But what we often forget to take into account, while performing as an investor, is a proper check of all the partners involved – not only the entrepreneurs we give our money to. In this short article, we provide several useful tips on safe and perspective co-investing.
1. Search for co-investors in pursuit of the returns
Do not be surprised to see such a ‘logical’ tip. Turns out, people often invest in projects for personal reasons only – because of some relationship issues or corporate strategic values – which is far from the objective decision and, therefore, not promising partnership for you. It’s always worth understanding your potential partner’s investment motivation and co-invest with people, who believe in the great financial opportunity provided by the project.
2. Check out the portfolio
The more experienced investor your partner is, the better: it means they can easily identify talents and add value. Plus such co-investors will definitely attract the best entrepreneurs and apply all their active involvement to gain success for the project.
3. Do due diligence
Be extremely careful about the deal terms, proposed by your co-investor, check everything twice. For example, it is great to cooperate with the investor, who will be involved in the company’s day-to-day. However, in this case, the co-investor is very likely to ask for some preferential terms like options or warrants (so called kickers) to reduce the entry valuation. You should make sure such special treatment is really necessary.
4. Mind the competitors
Before investing in the company you see for the first time, do some research: why other investors might have disagreed to invest in it, maybe it’s better to support the competitor company, or maybe the startup founders lack experience? Do not participate in the deal that was denied by other capitalists.
5. Choose partners with objective views
Co-investing with someone, who has already participated in the previous rounds and thus knows the company well, seems to be a good idea. However, these investors may not believe in the success of the project and just need your money in order to reduce potential losses. All this is about preferential co-investing with people, also seeing the project for the first time: you both won’t have any attachment to the company (neither emotional nor financial) and will make exceptionally objective decisions.
6. Co-invest with the lead
Most of the industry investors are in fact co-investors already: accelerators, angels, VCs. Even those, who make a considerable investment and seem to be professionals, may be co-investors. It is all natural, but you’d better choose the partner with a good understanding of the industry, unbiased conviction about the investment opportunity – in other words, a true lead.
7. Alignment of interest
It is of big preference to co-invest with people, having the same interests in your joint venture. For example, if you have, let’s say, $3 million to offer, it is better to cooperate with an angel, proposing $20 million, rather than a venture fund with $300 million valuations. Also, pay attention to your co- investor’s strategic values: angels usually consider valuation because of their inability to provide indefinite support to the company, VCs are interested in ownership – by initially allocating relatively small amounts and increasing them at later stages, venture funds are expecting larger opportunities in the future.
8. Everything should be based on mutual trust
Startup investing is not a poker game: all the sides should trust each other and perform as trustworthy partners both for entrepreneurs and co-investors. Otherwise, putting down each other, aggressive financial rounds, tense boards and some other negative instances might considerably reduce the project’s potential for success and turn all the business from joy to non-stop hostility.
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