What you need to know before you co-invest
Shelly Hod Moyal, a founding partner of iAngels, talks about what you need to know before becoming a co-investor.
One of my investors recently asked me a frank question: “Shelley, if I had the opportunity to invest together with people I hardly know how to prevent me from being thrown?”. Good question. Most investors who invest in startups can actually do this only with other investors.
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As scrupulously as you study an entrepreneur, technology, and market conditions, you need to study the people with whom you are going to invest money. Why do they invest? What is their track record? What benefits can they bring to a startup? Why did they suggest investing with them?
I offer 10 tips for successful co-investment.
1. Join investors who are engaged in this with the aim to earn.
It would seem obvious, but not here it was. Investors invest in companies for a variety of reasons. Angels invest because they know the founder or want to help him. Corporations can invest because they see the strategic value of technology for their company, rather than enrichment.
If you are going to invest money with other investors, try to understand what caused their interest in the project, and choose those who want to make money.
2. Study the co-investor's track record
Try to choose partners who have proven their ability to see talent (having a portfolio of successful projects) and who can contribute to the project not only with money (they can also open the necessary doors, expertise and raise capital). Such investors have a sighted eye on potentially lucrative deals, and it is to them that top-level entrepreneurs turn. And more importantly, their connections and active participation in the project increase the likelihood of success.
3. Fear of guest performers
It is more reasonable to trust an investor who regularly offers you deals than one that comes to you once a hundred years. In the first case, you do not need to think about why you suddenly turned to you with a proposal, especially if you are told about each transaction. And when this is a single offer, then perhaps the investor simply cannot close the round in any way, and you should be careful about the deal.
4. Conduct a comprehensive audit.
Although you can rely on the results of legal due diligence conducted by your partner (to save money, time and effort), it is important to carefully examine all the conditions of the proposed transaction.
Eminent investors who actively participate in the current management of a company often require special conditions in the form of “bonuses” (options or warranty obligations), significantly reducing the relative cost of the project. As a co-investor, your task is to ask yourself whether such a privileged attitude is reasonable and whether the declared value is proportional to the possible risks.
5. Remember adverse selection
If you are facing a company for the first time, assume that other investors are already familiar with this company. Try to understand why other angels and venture funds were not interested in this project, someone wanted to invest money, but already invested in their competitors, or they have an old conflict with the founders, or there are not enough connections in the field to promote business development.
Try to find "chips" that other investors missed (in technology, the team, in terms of the market situation, etc.) in order to have more reasons to invest and not invest money in a business that nobody needs.
6. Be wary of interested parties.
It is great when investors who invested money in the previous round continue to support the project in the next one. But remember that these investors already have a working relationship with the founders, they have confidential information about the company's prospects, and they understand that they are closely watched by potential investors.
If they themselves do not believe in the company, then they find themselves in a vicious circle. If they invest further, they risk even more money, if they do not invest, the company will not be able to collect enough money in the next round, which is guaranteed to lead to a crash. On the other hand, investors who see the project for the first time are more objective, since they do not have an emotional and / or financial connection with the company, and their interest will be more unbiased.
7. Be wary of becoming a co-investor co-investor.
In venture projects all are co-investors - accelerators, angels, venture funds, corporate venture funds, private equity funds. Even the coolest venture capital professionals who themselves lead rounds, in 90% of cases act as a co-investor. To avoid a vicious cycle, try to identify one, albeit small, investor with successful investment experience. This could be an angel, an industry specialist, a partner in a good venture fund — someone who knows the industry and is confident in the project, regardless of the opinions of other people. On it and it is worth being guided.
8. Evaluate the contribution of the co-investor in proportion
It is worth choosing a partner who is most interested in the project. In monetary terms, for different investors, the same project has a different value. For an angel, $ 200,000 can be a significant amount and an indicator of his deep faith in the company. For a venture fund, this is just a “pen test”. That is, if a venture fund of $ 200 million invests $ 200,000, then it risks only 0.1% of its funds.
One can guess that in this case a limited amount of attention will be paid to the company. Moreover, if a company does not meet expectations and does not grow into a major player, the venture fund may not want to continue to invest in the future, which will lead to the reluctance of other investors to invest in the company.
9. Equality of interest
You can talk about equality, if you invest with a partner with about the same opportunities as you have. If you have 3 million, it is more logical to invest in the project together with the angel, who has 20 million dollars, than together with the venture fund of 300 million dollars.
Like individual investors, angels are important in project cost, and venture capital funds prioritize equity. The reason is that usually the angels do not have the possibility of long-term participation in the project, whereas the venture fund with a lot of money has an interest in large transactions. The funds invest little by little at the beginning in order to double the investment at a later stage, when it is clear that the project is going well, and thus to maintain its equity participation.
10. Consider the motives of each co-investor in evaluating the transaction.
Strategic investors (corporations) often do thorough preparatory work and testing before investing to plan a competent exit strategy and understand how the technology will be integrated into their product line or IT infrastructure. For a co-investor, of course, it is beneficial for a startup to increase its profits four times through distribution through corporate channels.
But if at the same time a startup has to sign an agreement on exclusivity, prohibiting cooperation with other companies, or provide the right of the first offer, which prevents the opportunity to take part in the merger / acquisition, this may harm the project. Take into account the motives of all co-investors when evaluating the transaction.
Trust partners
Investing in startups should be fun. Cooperate with reliable people whom you trust, create a good reputation for yourself, so that you would be a welcome partner for investors. Investments in startups are always based on partnerships with entrepreneurs and co-investors. The path can be very thorny, if you enter it with the wrong people.
I watched the hassle at meetings, I saw how investors drowned entrepreneurs, conducted aggressive rounds and so on, and all this reduced the chance of success, and, frankly, made investing into a dull business.
If you adhere to most of the above rules, your deals will be profitable.
One of my investors recently asked me a frank question: “Shelley, if I had the opportunity to invest together with people I hardly know how to prevent me from being thrown?”. Good question. Most investors who invest in startups can actually do this only with other investors.
')
As scrupulously as you study an entrepreneur, technology, and market conditions, you need to study the people with whom you are going to invest money. Why do they invest? What is their track record? What benefits can they bring to a startup? Why did they suggest investing with them?
I offer 10 tips for successful co-investment.
1. Join investors who are engaged in this with the aim to earn.
It would seem obvious, but not here it was. Investors invest in companies for a variety of reasons. Angels invest because they know the founder or want to help him. Corporations can invest because they see the strategic value of technology for their company, rather than enrichment.
If you are going to invest money with other investors, try to understand what caused their interest in the project, and choose those who want to make money.
2. Study the co-investor's track record
Try to choose partners who have proven their ability to see talent (having a portfolio of successful projects) and who can contribute to the project not only with money (they can also open the necessary doors, expertise and raise capital). Such investors have a sighted eye on potentially lucrative deals, and it is to them that top-level entrepreneurs turn. And more importantly, their connections and active participation in the project increase the likelihood of success.
3. Fear of guest performers
It is more reasonable to trust an investor who regularly offers you deals than one that comes to you once a hundred years. In the first case, you do not need to think about why you suddenly turned to you with a proposal, especially if you are told about each transaction. And when this is a single offer, then perhaps the investor simply cannot close the round in any way, and you should be careful about the deal.
4. Conduct a comprehensive audit.
Although you can rely on the results of legal due diligence conducted by your partner (to save money, time and effort), it is important to carefully examine all the conditions of the proposed transaction.
Eminent investors who actively participate in the current management of a company often require special conditions in the form of “bonuses” (options or warranty obligations), significantly reducing the relative cost of the project. As a co-investor, your task is to ask yourself whether such a privileged attitude is reasonable and whether the declared value is proportional to the possible risks.
5. Remember adverse selection
If you are facing a company for the first time, assume that other investors are already familiar with this company. Try to understand why other angels and venture funds were not interested in this project, someone wanted to invest money, but already invested in their competitors, or they have an old conflict with the founders, or there are not enough connections in the field to promote business development.
Try to find "chips" that other investors missed (in technology, the team, in terms of the market situation, etc.) in order to have more reasons to invest and not invest money in a business that nobody needs.
6. Be wary of interested parties.
It is great when investors who invested money in the previous round continue to support the project in the next one. But remember that these investors already have a working relationship with the founders, they have confidential information about the company's prospects, and they understand that they are closely watched by potential investors.
If they themselves do not believe in the company, then they find themselves in a vicious circle. If they invest further, they risk even more money, if they do not invest, the company will not be able to collect enough money in the next round, which is guaranteed to lead to a crash. On the other hand, investors who see the project for the first time are more objective, since they do not have an emotional and / or financial connection with the company, and their interest will be more unbiased.
7. Be wary of becoming a co-investor co-investor.
In venture projects all are co-investors - accelerators, angels, venture funds, corporate venture funds, private equity funds. Even the coolest venture capital professionals who themselves lead rounds, in 90% of cases act as a co-investor. To avoid a vicious cycle, try to identify one, albeit small, investor with successful investment experience. This could be an angel, an industry specialist, a partner in a good venture fund — someone who knows the industry and is confident in the project, regardless of the opinions of other people. On it and it is worth being guided.
8. Evaluate the contribution of the co-investor in proportion
It is worth choosing a partner who is most interested in the project. In monetary terms, for different investors, the same project has a different value. For an angel, $ 200,000 can be a significant amount and an indicator of his deep faith in the company. For a venture fund, this is just a “pen test”. That is, if a venture fund of $ 200 million invests $ 200,000, then it risks only 0.1% of its funds.
One can guess that in this case a limited amount of attention will be paid to the company. Moreover, if a company does not meet expectations and does not grow into a major player, the venture fund may not want to continue to invest in the future, which will lead to the reluctance of other investors to invest in the company.
9. Equality of interest
You can talk about equality, if you invest with a partner with about the same opportunities as you have. If you have 3 million, it is more logical to invest in the project together with the angel, who has 20 million dollars, than together with the venture fund of 300 million dollars.
Like individual investors, angels are important in project cost, and venture capital funds prioritize equity. The reason is that usually the angels do not have the possibility of long-term participation in the project, whereas the venture fund with a lot of money has an interest in large transactions. The funds invest little by little at the beginning in order to double the investment at a later stage, when it is clear that the project is going well, and thus to maintain its equity participation.
10. Consider the motives of each co-investor in evaluating the transaction.
Strategic investors (corporations) often do thorough preparatory work and testing before investing to plan a competent exit strategy and understand how the technology will be integrated into their product line or IT infrastructure. For a co-investor, of course, it is beneficial for a startup to increase its profits four times through distribution through corporate channels.
But if at the same time a startup has to sign an agreement on exclusivity, prohibiting cooperation with other companies, or provide the right of the first offer, which prevents the opportunity to take part in the merger / acquisition, this may harm the project. Take into account the motives of all co-investors when evaluating the transaction.
Trust partners
Investing in startups should be fun. Cooperate with reliable people whom you trust, create a good reputation for yourself, so that you would be a welcome partner for investors. Investments in startups are always based on partnerships with entrepreneurs and co-investors. The path can be very thorny, if you enter it with the wrong people.
I watched the hassle at meetings, I saw how investors drowned entrepreneurs, conducted aggressive rounds and so on, and all this reduced the chance of success, and, frankly, made investing into a dull business.
If you adhere to most of the above rules, your deals will be profitable.
Source: https://habr.com/ru/post/298740/
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