A potential investor claims to have overseas contacts. Should I trust them?

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I’ve had an offer from an investor who says he has proven sales routes into Asia, which will help rapidly grow my business.

How much work should I put into finding out how solid these connections are? Do I need to get on a plane and investigate it all myself? Seems like a lot of work and cost at the moment.

There are different types of investors for early-stage businesses and they are commonly divided into two camps – “smart money” and “passive investors”.
If the smart money investor brings industry connections, customers and experience alongside the capital they invest, then real value can be created.

Your potential investor claims that they have “proven” sales routes into Asia to help you grow your business. You should definitely test this claim, but there is no need to spend the time or money travelling to Asia.

Ask your investor for the details of his connections:

  • When and where were the deals completed?
  • What size were the deals?
  • What were the sales lead times?
  • From what location were the sales made?
  • What after sales support was needed?

How your potential investor responds to the above requests for data will give you a strong indication of the value and depth of this claimed Asian sales channel.

Once you have the data, test it by calling three of the clients or partners and discussing how they view your investor, and if they would continue to do business with them.

If you are happy with the results of this exercise – which should take you less than 60 minutes – by all means discuss terms with your investor, but aim to keep your valuation at the level you would give to a passive investor.

The smart investor, with in this case Asian sales channels, should invest at the same value as others. The value created by the Asian connections will be rewarded by the growth in your business.

If the investor undertakes to spend considerable time in managing the Asian opportunity, then by all means negotiate a separate commercial agreement based on actual results with your investor. Do not give anyone equity for promised revenue or introductions.

You are right to be sceptical of a new investor’s claims, so test them quickly and move on, one way or the other.

As a wise fellow from Vinci remarked in 1498, “We are deceived by promises and time disappoints us…”. It is still true today.

© 2013 – 2014, Philip Alexander. All rights reserved.

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