What is compatibility in the context of small business investing and why is it important?
Private direct investment is very different than buying a publicly traded security. Investors do not have the same regulatory support or liquidity as a publicly traded stock. While we have witnessed a number of publicly traded companies mislead the public with incorrect or incomplete information in the past, at least there is a formal structure with a set of reporting regulations and consequences for failing to adhere to those regs and provide certain information to investors. With startups and small businesses, there is much less information available and very little regulation on what must be shared with investors.
Because of this, there is a greater element of compatibility required between the small business investor and the small business.
Trust and Alignment of Purpose
Understanding this need for compatibility is one of the key topics in the ActSeed Investor Workshop (“How to Evaluate Deals Like a Professional Angel Investor”). Simply stated, we strongly recommend that seed stage investors and startup entrepreneurs are fully aligned in purpose and culture as well as around expected return on investment and “exit strategies”. At the early stages of a business, investors should be viewed as a partner, not as a transaction – a co-pilot and navigation assistance, not merely gas in the tank. The business risk is extremely high in the early stages of a new company and the investor should play an active role in helping the entrepreneur steer clear of pitfalls.
Last year, we created a fun vignette about how ActSeed was like an “eHarmony for startups and investors” – how we help match investor-entrepreneur compatibilities. Recently, we had an inquiry from an entrepreneur who didn’t quite understand our analogy, and interestingly, was persistent in trying to understand how we were an “eHarmony to investors”. So, we drafted a candid reply:
“Simply put, most early/seed stage investors look for strategic and long term compatibility, not “quick hits”. The days of throwing money into something based upon a whim or basic concept are gone.
eHarmony markets their community as one where “people are brought together based on the things that really matter” (the current front page quote on eHarmony.com). ActSeed does the same for investors and entrepreneurs.
To further apply the personal relationship / eHarmony metaphor: investors aren’t interested in “one night stands” and “casual encounters.” Investors are no longer being seduced by what sounds good without verifying what IS good. ActSeed provides a mechanism to help the investor verify and accelerate the due diligence process by 60-90 days.
The common theme from our growing Investor Group members is that they don’t have time to see millions of interesting ideas, but they want to quickly find a few good ones that match their interests AND that provide evidence of preparedness in the core areas of business …PLUS a demonstrated ability to execute a sound plan.”
We know ActSeed isn’t for every entrepreneur, but we pledge to our growing group of Investors that the companies and entrepreneurs they will find within ActSeed’s Entrepreneur Group are ready to “extend trust” through an early presentation of the due diligence issues that will eventually need to be addressed anyway. The sooner this information is “on the table”, the faster a deal can be done or the parties can move on. If you can use the ActSeed process to cut 60-90 days out of the due diligence process, why not?
Within ActSeed, in order for a successful investment to occur:
- ActSeed presents the questions to be answered
- The Entrepreneur must provide the answers
- The Investor must trust the answers
Are you an ActSeed Investor?
If you are someone who wants to invest an amount between $5,000 and $5 million in early stage, seed stage, startup or small businesses, please join ActSeed’s Investor Group. It’s free to join, takes 15 minutes to set up, and allows you to interact on a username basis and allows you to reveal your real identity when and if you choose (to avoid the possibility of “overly ambitious” entrepreneurs).
Learn more about ActSeed’s Investor Group through the resources below:
Click here to download a 1-page PDF about ActSeed’s Investor Group
Watch a two-minute video about ActSeed’s Investor Group:
Join ActSeed (no cost).
Let us know how we can help you get set up.