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Not all Shareholders are Created Equal
Having a mix of shareholders is important as a company grows and develops. As you raise capital (and once you get over the joy and excitement that someone has agreed to invest in you and your business), you need to recognise that as you progress, shareholder behaviour and expectations change. Not all shareholders are created equally and having a strategy for having the right shareholders is critical. If you don’t have a strategy, you are asking for problems.
The type of shareholder you have has an impact on the success of your business – understanding the types are important in determining what you can expect in the months/years ahead.
In our experience with capital raising, we have seen these broad types of investor. These are some of the best and worst generalised traits of shareholder types.
Friends, Family & Fools
Relatively self-explanatory. Even if you are successful they will make you feel guilty about how long it has taken and how little you have made them.
Do-Gooder, aka the ‘Well-Meaning Uncle’
The investors who have some spare cash and want to invest in something that can make a difference to the world (and their bank account). They will be enthusiastic at the beginning, but will wane as further calls for capital are made and they become diluted. Eventually they will become disillusioned and vocal at the AGM about why has this taken longer and cost more.
Lotto Winner / King Midas
These are potentially dangerous investors. They’ve made some money due to blind luck or being in the right place at the right time. They believe all they now touch will turn into gold – and when it doesn’t, it’s the founders fault, because the last founder they knew made it happen. They typically made money from buying Xero shares (thanks Rod), and act as if their share purchases were the reason Xero did so well.
The Passenger / Dentists with Dollars
They often have no clue about the business, sector or technology play at hand. They like the cut of the jib of the founder, and maybe their accountant said this was a good idea, or that ‘lots’ of wealthy people like you are investing in this sort of ‘thing’ or “I heard that Stephen Tindall is investing in this.” This ‘thing’ can be substituted with the latest fad, for example, Internet Of Things (IOT).
The Predator / Vulture-Capitalist
They will be very helpful up front, offer you more cash than you need, with just a few conditions. If on the slight chance (their words) you don’t meet the milestones, there will be a “few minor tweaks to the share register.” They will shaft you and dilute you faster than you can say “waaaaaaaa.”
The Cornerstone aka the Gemstone
The investor who knows what you are doing, has done it before, and understands that as a 20% plus shareholder he has an obligation to support through follow on rounds and will bring new investors to the table. Erect a statue to these ones!
The Big Noter / Charlie Big Cigar
This is the investor who comes on board and demands to be a director as well. Mistakenly believes that only shareholders know how to run a company. You are excited because his/her name will attract new customers/investors/employees, but seldom does this actually work – hardly ever works with an off-shore investor/director for a New Zealand company.
Able and Active
Similar to the gemstone, this investor will offer help and insights from their experiences. Doesn’t call to just ask if you have made him/her richer today.
The Venture Capitalist / Private Equity Fund
They can and will make big promises about what they can do and the networks they can plug you into to get you ready for your series A or the ‘exit’. Do not engage if you need a quick decision or money with no strings attached. Best to talk to them when you don’t need any funding and are at your most confident of success. After six months of their fast-track Due Diligence you will be emotionally crippled – just the act of breathing will hurt.
Driver / Active Supporter / Cheerleader
The investor who goes out of his/her way to find new investors, customers or employees. Often will get his/her father-in-law to invest.
Just call him/her and they will tap into their network and make introductions for you. Worth their weight in gold. Won’t take a major stake or demand a seat at the board. You should try and convince them to come onto the board.
The Viking / Barbarian at the Gate
Like the predator, the sunny side is indeed sunny, but when it doesn’t go to plan, enter into Dante’s Nine Levels of Hell.
NZ Venture Investment Fund
These guys receive a lot of criticism as investors. Some warranted, most is not. Talk to them, understand what they can and can’t do for you. Keep in mind that they are not an ATM.
Again, target of much criticism, most fair, some unfair. Think of them (click here to view their website) as a partner who came from the deepest darkest basement full of bureaucrats. Not an investor, but a source of funds. They are not agile, don’t expect them to be. They are not an ATM. All their staff get paid every month regardless of what they do or do not, very few understand running their own business or being a founder.
In summary it takes all sorts to build and fund a company. Having good people as investors who can carry their share of bricks (and maybe more than their share) will help you in the long run. Saying ‘no’ to some potential investors is hard, but getting the wrong ones on board can cause you a world of hurt.
- Recognise what type of shareholder you signing up early.
- Set expectations about the journey and what you expect from them as shareholders.
- Talk to them regularly.
We can help you to find the right investors for your business and help manage out the not so good investors. Give us a call and get us involved in the journey.