Unless the founders are already well funded, at some point most companies are going to need external investment to support business growth. This can come from a range of sources, and there may be fish-hooks.
What to look for in an investor/business partner
The harsh reality is that not all investors or business partners are going to be good for your business. How can you sort out the good from the bad?
Key Factors
Transparency
Track record
Risk allocation
Rewards promised
Investment delivery
Warning signs
Hype
Unequal assumption of risks and benefits
Dishonouring promises
Good cop/bad cop routine
Failure to ensure independent advice
Concerns that you are being treated as a prospect rather than a business partner
Examples
1. Chinese investor/ business partner- NZ company
A growing Auckland specialist retail packaging company needed capital to expand and explore overseas market opportunities. Conventional funding options were already stretched and local equity investment offers weren’t attractive. Hearing on the grapevine that the company was looking to expand, a Shanghai supplier of packaging products to the company made an offer to take 50% of the shares, including a joint managing director role. Complicating matters was the fact that the supplier spoke no English and the Kiwis no Mandarin. With the help of trusted advisers in China and New Zealand the language barriers were overcome and a sustainable deal negotiated in a form that both parties could understand and agree to.
Coming back to the key factors mentioned above:
Transparency
It was clear what each party really wanted from the outset. The difficulties of relatively small scale international investment with language issues, combined with proper independent advice and full due diligence, meant there was no room for hidden business motives.
Track record
The parties had known each other and done business together for some time, and had a good understanding of each other’s business history and reliability.
Risk allocation
While a 50/50 partnership has potential problems, each party has the same amount to lose or gain. Efficient voting deadlock and dispute resolution mechanisms provide a safety net if problems do arise.
Rewards promised
In an equal bargaining power scenario such as this, no inducements to contract needed to be given.
Investment delivery
Once all due diligence items and legalities were complete, money and shares changed hands without delay.
2. NZ strategic advisory/management company-NZ start-up
Three young Canterbury University graduates set up a company to develop a social media app. They had a working model but needed international promotion and financial investment to make the company commercially viable. They were introduced to the directors of a professional advisory business who said they could make the right connections which would lead to international sales and substantial investment. Pressure was applied to sign a management contract, which did not lead to any of the promised benefits, but did contain plenty of fish-hooks, including share transfers for “services rendered”. The warning signs were there:
Hype
Unrealistic growth projections made
Unequal assumption of risks and benefits
Contract heavily in favour of strategic partner
Dishonouring promises
Promises and representations left out of contract
Good cop/bad cop routine
A sure sign of pressure tactics
Failure to ensure independent advice
A trap for the inexperienced
Concerns that you are being treated as a prospect rather than a business partner
All of the above creates this inference
How to avoid this scenario
Questionable business practices don’t belong in business partnerships but are common in hard-sell areas of the business world, and New Zealand business is no exception. To find the right investor/business partner fit and avoid being the victim of unscrupulous operators:
Be prepared
Know what you want
Understand and seek out the right types of investors/partners
Get help in this process from personally trusted sources
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