What you need to know before co-investing

Original author: Shelly Hod Moyal
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Shelley Hod Moyal, iAngels Founding Partner, talks about what you need to know before becoming a co-investor.

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One of my investors asked me a recently frank question: “Shelley, if I had the opportunity to invest together with people whom I barely know how to prevent me from being thrown?” Good question. Most investors investing in startups can actually do this only together with other investors.

Just as thoroughly as you study the entrepreneur, technology, and the market situation, you need to study the people with whom you are going to invest money. Why are they investing? What is their track record? What benefits can they bring to a startup? Why did they offer to invest with them?

I offer 10 tips for a successful co-investment.
1. Join the investors who are doing this with the goal of making money.

It would seem obvious, but it wasn’t there. 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 the possibility of 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. Examine the co-investor track record

Try to choose partners who have proven their ability to discern talent (having a portfolio of successful projects) and who can contribute to the project not only with money (they can also open the right doors, expertise and raise capital). Such investors have an eye on potentially profitable deals, and it is to them that entrepreneurs of the highest level turn. And more importantly, their connections and active participation in the project increase the likelihood of success.

3. Fear of flying guest performers

It is wiser to trust an investor who regularly offers you deals than one who comes to you once every hundred years. In the first case, you don’t have to think about why you suddenly came up with a proposal, especially if you are informed about each transaction. And when this is a single offer, then perhaps the investor simply can’t close the round in any way, and you should be careful about the deal.

4. Carry out a comprehensive audit

Although you can trust the results of a legal audit conducted by your partner (to save money, time and effort), it is important to carefully study all the conditions of the proposed transaction.

Famous investors who actively participate in the current management of the company often require special conditions in the form of “bonuses” (options or guarantees), significantly reducing the comparative cost of the project. Your task as a co-investor 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 faced with a company for the first time, proceed from the assumption 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 the “chips” that other investors missed (in technology, team, from the point of view of the market situation, etc.) in order to have more reasons to invest and not invest in a business that no one needs.

6. Beware of stakeholders.

It is wonderful when investors who invested in the previous round continue to support the project in the next. But remember that these investors have already established working relationships with the founders, they have confidential information about the prospects of the company, and they understand that potential investors are closely watching them.

If they themselves do not believe in the company, then they find themselves in an enchanted 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 collapse. 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 of a co-investor

In venture projects, everyone is a co-investor - accelerators, angels, venture capital funds, corporate venture capital funds, private equity funds. Even the coolest venture capital professionals, who lead the rounds themselves, in 90% of cases act as co-investors. To avoid a vicious circle, try to identify one, even a small, investor with experience in successful investments. This may be an angel, an industry specialist, a partner in a good venture capital fund - someone who knows the industry and is confident in the project, regardless of the opinions of others. It is worth focusing on it.

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 different values. For an angel, $ 200,000 can be a significant amount and an indicator of his deep faith in the company. For a venture capital fund, this is just a “pen test.” That is, if a venture fund of $ 200 million invests $ 200,000, then only 0.1% of its funds are at risk.

You can guess that in this case, the company will be given a limited amount of attention. Moreover, if the company does not live up to expectations and does not grow into a major player, the venture fund may not want to continue investing 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. If you have 3 million, it is more logical to invest in a project together with an angel who has $ 20 million than in conjunction with a venture fund of $ 300 million.
Like individual investors, the cost of the project is important to the angels, and venture funds place equity at the forefront. The reason is that usually angels do not have the possibility of long-term participation in the project, while a venture fund with a lot of money has an interest in large transactions. Funds invest little at the beginning in order to double investments at later stages, when it is clear that the project is going well and, thus, to maintain its shareholding.

10. Consider the motives of each co-investor when evaluating the transaction

Strategic investors (corporations) often conduct thorough preparatory work and testing before investing in order to plan a competent exit strategy for the transaction and understand how the technology will be integrated into their product line or IT infrastructure. For a co-investor, it is naturally beneficial for a startup to increase profits by four times through distribution through corporate channels.
But if at the same time the startup must sign an exclusivity agreement prohibiting cooperation with other companies, or provide the right of the first proposal, which prevents the possibility of taking part in the merger / acquisition, this can harm the project. Take into account the motives of all co-investors when evaluating the transaction.

Trust partners

Investing in startups should be fun. Collaborate with reliable people you trust, build yourself a good reputation so that you are 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, saw investors drowning entrepreneurs, conducted aggressive rounds and more, all of which reduced the chance of success, and, frankly, turned investing into a dull task.

If you adhere to most of the above rules, then your transactions will be profitable.

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