The vast majority of organizations require investors to obtain the capital needed to start a new business or expand an existing one. While a specific investor may have the best interests of the company in mind, that’s not always the case. There have been numerous instances where an individual Investor has undermined the company for personal gain rather than contributing to the organization’s growth and long-term success. Before entering into any relationship with an investor, it pays to consider whether that individual is a good fit for the organization seeking funds. Also interesting: using a dataroom for due diligence or M&A transactions.
Why Are Shady Investors Dangerous for Your Business?
Virtually every business exploring new funding sources has long-term goals that may, at times, impact bottom line figures in the near future. Investors should be well aware of the company’s short- and long-term objectives when investing capital. That means they’re willing to forgo significant immediate gains in favor of larger long-term profits. A Shady Investor, on the other hand, will generally act as though they understand the plan but change their attitude significantly once their money has been accepted.
The less-than-optimal Investor will then attempt to alter the strategies employed by the company to enjoy a greater profit sooner. If they have a contractual ability to impact the organization’s business plan, that can quickly lead to problems with company personnel as well as other investors. The net result can, and often is, a failure to achieve the necessary results sought by the company. The question then becomes, what steps can an organization take to protect themselves from a Dangerous Investor?
The concept of Due Diligence has been around for a long time, but today’s organizations are quickly finding the actual process is evolving. An Investor may be sought out by the organization or may take the initiative and approach a business. Before getting involved with any potential Investor, an organization is always encouraged to look carefully at the potential investor to prevent issues from developing.
- Investors must understand and accept the company’s culture. An investor who doesn’t is likely to create strife from day one, which is certainly counterproductive. That means company representatives must review the organization’s structure and business strategies with a potential funder prior to accepting their capital. If the fit between the potential Investor and the organization appears appropriate, that’s one less thing to worry about.
- Don’t neglect to explore the potential funder’s past history as part of the due diligence. While an investor may appear to be a good fit, the individual may not, in reality, have the company’s best interests at heart. Generally, it’s relatively easy to discover how the investor has handled any previous similar relationships. If there is a history of the individual demanding a company change their strategy in the past, there is a strong likelihood it could happen again. It’s best to avoid investors with this type of history or a history that’s not transparent.
- Avoid diluting a company’s control. As a rule, no single outside investor should be able to acquire over 25 percent of the company in exchange for their investment. In the event the control is diluted too much, the potential for a takeover is simply too great. Even when a relationship with an Investor starts out on a stable footing, things can change. To avoid issues, make sure the existing company owners always retain control.
Of course, there are other due diligence strategies to follow and, as noted, they are evolving rapidly. All companies are routinely encouraged by experts to examine their current practices and take advantage of opportunities to improve those practices.
Investor input can be beneficial for companies, but that input must be limited. That suggests it’s always important to understand exactly who is investing and what their long-term objectives are. If an investor’s objectives actually align with the organization’s, the relationship will benefit both.