Choosing an investor is like choosing a spouse (but with less romance)

My guide to finding the perfect investor and successfully navigating the often-complicated world of fundraising

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Let’s be honest – raising money for a business is one of the most stressful and challenging parts of entrepreneurship. When someone offers funding, the instinct is often to say yes immediately. After all, you need the money, right? But not all money is good money, and the wrong investor can bring far more problems than solutions.

In today’s competitive investment landscape, having the right people backing your company can make or break your success. The first step to ensuring a good fit is to focus your efforts on the right kind of investors. Look for individuals or firms with a track record in your industry or a deep understanding of the challenges and opportunities in your sector. These are the people who are most likely to invest and, perhaps even more importantly, offer valuable advice, connections, and mentorship.

The ideal investor doesn’t just bring money to the table. They bring experience, networks, and a genuine interest in helping your company succeed. In the best-case scenario, they’ll join your board or advisory team and contribute to your long-term vision. But let’s face it – finding the perfect investor is no easy feat. Most entrepreneurs will never encounter a textbook “dream investor” and must instead navigate a complex web of personalities, promises, and pitfalls.

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When you begin talking to potential investors, doing your homework is non-negotiable. A flashy pitch deck and initial interest don’t guarantee a good match. Dig deeper into an investor’s background. What kind of deals have they been involved in? How successful were those ventures? Just as crucially, how did the investor handle challenges when things didn’t go as planned?

Speak to other entrepreneurs who have worked with them. Did the investor step up during tough times, offering solutions and support? Or did they become a sideline critic, pointing out problems without lifting a finger to help? Treat this process like hiring a key team member – because, in many ways, that’s precisely what you’re doing.

Not every investor is a dream partner; some can harm your business. There are red flags you should watch out for.

One common type to avoid is Timmy Two-Face. Timmy initially presents himself as a serious investor but quickly pivots to offering services in exchange for equity. He might say, “I’ll invest if you hire me to complete [X].” The problem? Timmy rarely invests any money and is essentially a consultant fishing for gigs. Worse, these consultants are often mediocre and would struggle to win clients without this deceptive approach.

Another type to be wary of is Time Burglar Trish. Trish strings entrepreneurs along with endless requests for information, meetings, and updates, always saying, “Let’s wait until [X] happens.” She avoids committing, but her constant delays waste your time and energy. If you’ve been chasing Trish for too long, it’s time to get direct. Ask her outright: “Who have you invested in before?” Her response – or lack of one – will make it clear if she’s worth your time.

Then there’s the classic Vulture Vic. Vic offers funding with terms designed to wrest control of your company. His favourite tool? Convertible debt instruments with punishing repayment schedules. These deals often seem appealing at first – especially if you’re struggling to find other investors – but they’re designed to set you up for failure. Once you default on the payments, Vic swoops in and takes over. Avoid this trap by hiring a skilled securities lawyer to review any deal before you sign.

Finally, watch out for Larry Litigious, the investor who loves to fight his battles in court. A quick background check will reveal if an investor has a history of lawsuits. If they do, think long and hard before letting them into your business. Legal battles are expensive, time-consuming, and the last thing you need while trying to grow your company.

Fortunately, not all investors are like this. There are plenty of good ones who genuinely want to see you succeed. A good investor doesn’t just write a cheque – they bring additional value to the table. They might have deep industry expertise, valuable connections, or insights from their own experiences as entrepreneurs.

Some of the best investors act as mentors, helping you navigate challenges and avoid common pitfalls. Their advice can be just as valuable – if not more so – than the money they invest. But even good investors need boundaries and clear agreements. That’s why a solid shareholders’ agreement is crucial. It sets the rules for the relationship and ensures everyone is on the same page from the start.

A good shareholders’ agreement should address more than just the best-case scenario. It should also include plans for how to handle disagreements, financial challenges, or other crises. By working through these potential issues upfront, you can avoid many of the problems that derail other relationships between entrepreneurs and investors.

Building a company is one of the hardest things you’ll ever do. You’re taking on enormous risks, working long hours, and navigating an unpredictable landscape. The last thing you need is an investor who makes your life harder. Be selective. Ask the tough questions. Prioritise investors who bring more than just money; look for those who can offer guidance, connections, and genuine support.

The right investor can open doors you didn’t even know existed, offer insights that transform your business, and help you weather the inevitable ups and downs of entrepreneurship. The wrong one can derail your dreams entirely.

At the end of the day, it’s your business and your future. Choose wisely – you’ll thank yourself later.

Warren Bergen is the author of Swagger & Sweat, A Start-up Capital Boot Camp. 

The views, opinions, and positions expressed by our columnists and contributors are solely their own and do not necessarily reflect those of our publication.

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