In short:

• Growth capital can help businesses significantly increase their value, but be clear on how these funds will drive growth.
• Once a business has a clearly defined growth strategy, there are several financing strategies to evaluate.
• We’ll finish with some best practices and key questions for teams as they move forward raising growth capital.

“Begin with the end in mind” is an axiom made famous by Stephen Covey, author of “The 7 Habits of Highly Effective People.” Nowhere is this advice more important than when you’re planning to raise capital for business growth. Taking the time to make sure you really understand what you’re hoping to achieve with the capital you plan to raise provides clarity and direction.

At the highest level, there are only three main reasons to raise growth capital. They come down to funding one or more of the following growth strategies:

1. Faster core growth than the business’s cash flow supports;
2. Inorganic growth, such as M&A or adjacent-market entry, to complement the existing core business; or
3. Innovative new projects.

That’s it. Too many entrepreneurs make the mistake of viewing raising capital as a marker of success. It’s not! You don’t need to raise capital to be successful — for instance, in many situations, raising venture capital isn’t wise. Yes, raising capital can be a smart strategic decision to enable or accelerate growth when the business has a clear opportunity to do so and a strong plan to make it happen. But an outside financing event, of itself, won’t make your business successful.

Importantly, the three main growth strategies lend themselves to different financing strategies. Before we get to that, let’s discuss the growth strategies and their different potential outcomes. Because the details of your business may be nuanced, I’ll unpack each growth strategy with a few quick examples to help you think through which are applicable to your business.

Then, I’ll finish with a few key questions to help leadership teams think through the growth strategy they’re contemplating before starting to raise capital.

Growth Strategy 1: Enabling Faster Core Growth Than the Business’s Cash Flow Supports

Sometimes this strategy is about operational efficiency or scaling up production. More typically, it’s about increasing sales, marketing, and/or core product development investments; these may have a meaningful impact on growth but a slower payback period. All of this often requires investment in more comprehensive business management systems, much of which is addressed in our Project $50M series.

Here, we’ll focus on the capital implications of such investments.

A simple case in point: new customer acquisition. The lifetime value of a customer is significantly greater than the cost to acquire the customer, but that lifetime of revenue is paid out over months or years. Meanwhile, incremental new-customer acquisition costs negatively impact short-term cash flow. Long-term, of course, those customers may contribute significantly to the bottom line. So the business needs to raise capital to cover the short-term hit in expectation of long-term profitability.

Management should pay close attention as it makes these investments that neither of the following is happening:

• Acquisition costs per customer are increasing as the business scales, and/or
• New customers are different in some way that may cause them to have a lower lifetime value — for example, maybe they churn faster.

Monitoring both of these is important when using growth capital for customer acquisition costs because if either or both don’t track to your projections you can end up with a growing customer base but lower profits or, in extreme cases, losses.

Regardless of whether the growth capital is being used for acquiring customers, increasing operational efficiency, or scaling up production, it’s important to make sure that spending eventually translates to milestones that make the investment worthwhile.

Unfortunately, there are many companies that don’t have a reasonable path but keep consuming growth capital. Companies in this situation achieve what some growth equity investors call “profitless prosperity.” Eventually, they will run out of investors to fund this “prosperity” and be forced to make dramatic reductions in expenses or face bankruptcy.

Sometimes a business has already funded prior growth with outside capital but needs more capital to continue growing. It isn’t profitable today, but it has a clear path to profitability and doesn’t want to make the necessary expense adjustments to get the business profitable right now because that would diminish growth. This is very common for tech and life science startups given their significant early fixed costs.

Alternatively, a business may be profitable and growing but see a clear opportunity to accelerate growth with outside capital. It may have started with a small investment or even bootstrapped to profitability. For example, consider a small consumer packaged goods (CPG) food brand that started by selling organic snacks to a few local retailers. After a successful trial in the local Whole Foods store, it has the opportunity to sell in all locations nationwide. The business scaled to this point using the owners’ capital and cash flow, but getting to the next level will require outside capital.

Two warnings: Businesses sometimes grow to this stage without needing the financial rigor that helps them accurately see all their costs, or their customer lifetime value. Investors will demand better financial management. Second, once businesses start raising capital for growth it often becomes hard to stop; many future financing rounds become necessary. Venture investors often describe this phenomenon as the “VC treadmill.” Think about these issues carefully before starting down this path.

Growth Strategy 2: Inorganic Growth to Complement the Existing Core Business

Adjacent market expansion

Sometimes the strategy is to grow a business by expanding to a new market with similar customers and offering the same or a very closely related solution to those new customers. If the business has captured a significant percentage of its current target customers, then expanding the market may be the easiest way to continue growing.

A simple example: Imagine you run a very successful Greek restaurant that’s busy throughout the week and has long waits on Friday and Saturday nights. As you contemplate growth options, you may decide that you have captured most of the target market in your town. Therefore, instead of finding a larger location in your existing town (Growth Strategy 1), you decide to open a second location in a neighboring town. You are choosing Growth Strategy 2, expanding to a new market with similar customers instead of trying to continue growing your current market.

Management should pay close attention as it explores this strategy to ensure that new customers in the adjacent market are behaving similarly to existing customers. This often can be done by conducting small-scale tests ahead of making a significant investment.

Too many businesses push into opening new markets without validating that customers really are like those in their existing market, often because leaders don’t think creatively enough about how to validate a concept. In the context of a restaurant, lack of such validation could result in opening that second location in a community with significantly different demographics and, therefore, food preferences.

So imagine our restaurant’s new target town is a 30-minute drive away from the current location. Management might initially argue there is no way to “prove” customers will order from their Greek restaurant without signing a lease and opening a location. But if pushed not for “proof” but merely to increase their confidence, they might do one or more of the following experiments:

• Analyze their customer loyalty program to find the small percentage of existing customers from the planned new town who are traveling to their existing location. Conduct qualitative research — say, interviews over a free meal — to get these customers’ feedback on the new location.
• Set up a limited-menu offering at the local farmer’s market or similar “pop-up” location for a few weekends to test demand.
• Do targeted marketing to the new town with a coupon offering 10% off your meal with a unique code and then track the conversion of those campaigns.

An important point about this strategy is that in each of the three example tests above, you are doing an experiment for the purpose of validating or invalidating your assumptions about that new market. You aren’t investing in marketing to efficiently acquire customers; you’re investing to learn about a potential new market.

Expansion via M&A

Often, companies will explore inorganic growth via acquisition. For example, if you run a service business with 10 plumbers in your city, you may decide to acquire another similar service business in a neighboring city to enter that market.

On the surface, this can be really appealing. It can feel like a way to accelerate the speed at which you can scale in this new market. But keep in mind the advice of Roger Martin, former Dean of the Rotman School of Management at the University of Toronto. Martin pointed out in the Harvard Business Review that most acquirers focus on the wrong thing and, therefore, M&A fails up to 90% of the time. His advice:

Companies that focus on what they are going to get from an acquisition are less likely to succeed than those that focus on what they have to give it.

This insight applies to businesses large and small and is particularly important when thinking about leveraging an acquisition to accelerate inorganic growth. Don’t think about the acquisition target’s ability to get you into a new market. Instead, think about how your company can bring unique resources, expertise, and systems to make the acquiring company a stronger and better entity after the merger.

In the case of the plumbing business, instead of focusing only on the customers, it’s buying, the acquiring company could consider how it can bring efficiencies through, perhaps, its route management software and simplified mobile sales system.

After all, if the acquisition target is already successful and growing, you have to ask: Why is the owner letting you acquire it for a good price? On the other hand, if you can step in and truly make it a much better business, that could be a great way to enter an adjacent market.

Growth Strategy 3: New Innovation Projects

Here, the focus is on innovation to develop new products or services. In some cases, a new product or service will be incremental innovation developed for existing customers. For example, consider a very successful moving business with a fleet of 20 trucks. Instead of trying to grow to 50 trucks (Growth Strategy 1), you may develop other logistics solutions to sell into your existing market.

Alternatively, an innovation project could be transformative, like launching a new solution for new customers. For entrepreneurs who have conceived, launched, and scaled successful businesses, this is often a helpful way to scratch that entrepreneurial itch. Beyond the personal motivation of founders, it’s often strategically wise to build new lines of business that support future ambitions. However, the risks around a new line of business failures are very similar to the risks of any startup failing — in other words, quite high.

Therefore, the leadership team should make sure it has a good understanding of its unique competitive advantage to develop that new solution. There are scenarios where this may make sense, and you may have a great advantage. If you run a successful residential electrician business you may encounter a common electrical problem in all condos in your area and decide to create a new product to solve it, based on your expertise as electricians.

Just make sure you validate as many assumptions as possible as quickly and efficiently as possible — especially assumptions around why your new customer cares about the problem you’re solving. Similar to the Greek restaurant example in Growth Strategy 2, you can often test assumptions in creative and cost-effective ways early on. This is critical because leaders often get focused on how to solve a given problem in a novel way without ensuring customers care about the problem. Said another way, most innovation fails not because “it” can’t be built but because there isn’t enough customer demand.

The key questions leaders should ask themselves as they explore each of the three alternative growth strategies:

If management can confidently address the key questions in the table related to its chosen growth strategy, and confidently sign up for the related business projections, it will likely lead to a very positive outcome. If not, the company is likely to be in a worse situation after raising incremental debt or equity financing.

2 Different Business Financing Strategies

If you need outside capital to execute against one or more of the three growth strategies, at the highest level there are only two ways: Get a loan or sell some of the business’s equity. Of course, both approaches come in a variety of flavors that are worth exploring.

1. Business loans

In general, if a business translates its capital into incredible growth, a loan is the less expensive route because you haven’t given up any equity — or a very small amount if warrants are issued as part of the loan deal. Therefore, once the loan is repaid, all of the increase in equity value goes to the owners. On the other hand, taking a loan requires confidence that you can repay it from future cash flow.

Banks provide credit in a number of different forms, but most of these, such as a line of credit, are focused on smoothing out a business’s cash flow. When focusing on financing growth, the options are surprisingly limited — and term loans are the most typical approach. While specific repayment terms, interest rates, and loan amounts vary by the lender and specific loan product being offered since we’re focusing on growth capital that usually means multiyear term loans. So we won’t discuss short-term loans, which are more typically used as an alternative source of working capital, not growth capital.

When thinking about a term loan, you should review the offer in detail, but the key questions to focus on are:

• Is the interest rate fixed or variable?
• What is the repayment schedule? For example, is there a “balloon payment” at the end of the loan?
• Is there a prepayment penalty?
• What collateral is required to secure the loan?

Revenue-based financing is an alternative to term loans that has a distinct advantage. In this model, which shares characteristics with income-driven student loan repayment plans, rather than fixed monthly payments the business’s payments are instead tied to its revenue growth. The nice thing about this alternative funding model is that if sales slow, repayments slow in parallel until the business resumes growing. On the other hand, if a business’s revenue grows faster than projected it will repay the loan sooner than projected. This model is sometimes described as “royalty-based financing,” because the business is effectively paying a royalty on sales until its total debt is repaid.

While closely related to factoring receivables and merchant cash advances, revenue-based financing is for larger growth capital needs, whereas factoring receivables and merchant advances are more typically used to smooth out working capital fluctuations. For example, when a company factors receivables, it is effectively accelerating the collection of already contracted sales. Operationally, it does this by selling the receivables to a third party at a discount in return for quicker access to cash. In revenue-based financing, your future revenue secures the loan.

If pursuing revenue-based financing, it’s important to truly understand the cost of the capital being provided. While the flexibility is often quite compelling, the business must be able to operate on its remaining gross margin after making the payments.

2a. Selling equity as a private company

The alternative to loans when raising outside growth capital is to sell some equity in your business. In general, this is a much longer-term — and more significant — commitment between the company and its source of capital. Unlike a loan, when you sell equity to obtain growth capital, the source of the capital shares in the long-term appreciation of the business and, in some cases, may end up with ownership control.

You may have heard equity investors called private equity investors, growth equity investors, or venture capitalists. These labels had more meaning a decade ago, but since then the distinctions between them have grown blurry. In this article, we’ll refer to them all as private equity (PE) investors. And there’s one thing all PE investments share in common: A company’s owners, including its board of directors (if any), agree to sell part of their business to a PE firm in return for a growth capital investment. So, the central question in a PE deal is, What percentage of the company are we selling?

The standard way PE firms think about this question is that the company had some value before the investment (the “pre-money” value) and adding capital raises that to a new value (the “post-money” value). The math is actually simple: If the company was worth its pre-money valuation before raising capital, then the pre-money value plus the new capital raised equals what the business should be worth after. While determining valuation is often more art than science, both sides will assess comparable companies to help them determine these valuations.

How PE investments work

As an example, imagine a business is valued at $30 million before investment. A PE firm invests $10 million into the business. The business would then be worth $40 million — $30 million + $10 million.

Ownership percentages are calculated based on the post-money valuation. The PE firm owns a percentage equal to the value of its investment divided by the post-money valuation, while the previous owners’ percentage is the pre-money valuation divided by the post-money valuation. Coming back to our imagined business, the new PE investor would own 25% of the company post-investment ($10 million/$40 million) and existing owners would own 75% ($30 million/$40 million) of whatever percentage they owned before the transaction.

To effect this ownership change, the company issues new shares for the PE firm based on an agreed-upon price per share derived by dividing the total shares outstanding by the pre-money valuation. In our example, if the business has a $30 million pre-money valuation and 3 million outstanding shares, then each share is worth $10. The company issues 1 million new shares at $10 each for the PE firm, which amounts to 25% of the new level of 4 million total shares outstanding. The company is committed to spending that investment in ways that significantly >increase its enterprise value, and all shareholders reap the rewards of that appreciation.

Of course, in real life, these transactions end up being more complicated than this basic math. One common complication is a secondary offering, where founders and early employees or investors also sell part of their stake to the new investors, thus receiving a partial liquidity event. The most common reason for this is to give the early employees or founders an opportunity to diversify their personal net worth. In many cases, this aligns the investors’ and founders’ attitudes toward risk, because the founders no longer have all their net worth concentrated in one illiquid security.

A secondary transaction as part of a growth round is a similar, but different, process than completely preparing a company for sale. But because some PE firms prefer to acquire entire companies outright, sometimes a company that begins investigating equity options to raise growth capital ends up in a transaction where PE investors buy all of the company. Where that becomes a possibility, the transaction should be evaluated against other acquisition options, such as a strategic acquirer.

How to evaluate a PE term sheet

Typically, the first step in a PE deal is for the investors to provide a term sheet that specifies the key business conditions of their offer to invest. Besides spelling out proposed ownership percentages, term sheets may include provisions that can have a dramatic impact on potential outcomes.

Key questions to ask yourself when reviewing a term sheet include:

• Is there a control provision? Control provisions give the new investors rights that allow them to block the sale of the business at a certain valuation, or to specific companies, or both. If investors request this, it’s crucial for leaders to think through the implications upfront. A future acquisition offer the founding team is excited about may not be equally exciting to the PE firm. Control provisions can end up eliminating the option completely even if it would be the choice of the founders.
• Do the PE investors get a board seat? In many ways, adding investors to your board can be helpful. They bring connections and experience across a portfolio of investments that often add value to strategic discussions. But some investors aren’t so helpful, and can even become a huge distraction in certain situations. If you are going to add an investor to your board, it’s important to talk to other CEOs who have had this specific investor — not just the firm but the actual partner — on their boards.
• Do they get budget or expense approval over a specific amount? While it may not seem like a big deal, keep in mind that you and the management team may not be used to having to loop other people into these decisions. Again, the new investors may have helpful perspectives, but it may also take a lot of work to get them to understand why certain expenses are necessary.
• Do they have inspection/information rights to specific financial statements? On the surface, this is very straightforward: The investors get the right to understand what’s going on in the business they’ve invested in. However, it can create work you and your team aren’t anticipating. For example, if annual financial statements need to be audited, then you should make sure you are accounting for that in your plans, both in terms of the effort to do an audit and the expense of hiring an audit firm.
• Do they have the right to participate in any future financing events to maintain their ownership percentage? These are typically called “pro-rata rights” and are just that — rights, not obligations. In other words, investors with these rights aren’t required to maintain their ownership percentage but must be offered the chance to participate in future financings. If a large professional PE firm chooses not to exercise its pro-rata rights, it can be seen as a concerning signal: What does this existing investor know that I don’t? But when the PE investor is a high-net-worth individual, aka an “angel,” or a smaller fund, the signal is less clear.

Understanding liquidation preferences

Of all possible term sheet provisos, liquidation preferences can become the most impactful, depending on the eventual outcome. It’s almost always the case that the PE firm’s stock gets a preferred return in a sale (liquidity event), before proceeds are divided based strictly on the percentage of shares owned. Typically, such liquidation preferences are roughly equivalent to the amount of capital invested by the PE firm but can be multiples of that as well.

There are two ways a liquidation preference can work. More commonly, the investor has to choose either to use its liquidation preference or just divide the proceeds based on ownership percentages. This is called a “non-participating preference.” However, in some cases, the investor will get its preferred return and then participate based on ownership percentages, which is called a “participating preference.”

To illustrate the impact of liquidation preferences, let’s come back to our example business now worth $40 million after a PE firm purchased 25% of the company for $10 million, and consider the impact of four possible liquidation preferences.

$10 million, and consider the impact of four different possible liquidation preferences.

Scenario 1: $30 million sale

In this unfortunate scenario, the company later sells for what its pre-money valuation was when it received the $10 million investment. This obviously is not what anyone was hoping for when the PE firm invested, but it does happen. In this case, if the original owners looked at their 75%, they might expect to receive $22.5 million (75% of $30 million) but because of the liquidation preference, they won’t receive that in any of the situations.

Scenario 2: $75 million sale

In this scenario, the company grows in value from the $40 million post-money valuations to sell later for $75 million. Again, if the original owners looked at their 75% they might expect to receive $56.25 million. But they only receive that in option one, where the PE firm chooses to take its proceeds from the ownership percentages instead of using its liquidation preference because with a non-participating preference, the returns are greater from its ownership percentage. This is called “clearing the preference stack.”

Scenario 3: $150 million sale

In this scenario, the company will clear the preference stack in both options one and three, which is why those options have the same proceed distribution in the accompanying table. But for options two and four, the PE firm gets its preferred return ahead of dividing the remaining proceeds based on ownership percentages. This is important because it shows no matter how good the outcome, a participating preference will always have a significant impact on the ultimate return calculation.

2b. Selling equity as a public company

Historically, most companies went public via a traditional Initial Public Offering (IPO) process. Today, companies have more options when contemplating going public. Specifically, an increasing number of companies are going public via direct listings or special purpose acquisition companies (SPACs). All three options can raise significant growth capital — and allow founders, early employees, and investors to cash out some or all of their liquidity.

Traditional initial public offerings

Investment bankers drive the traditional initial public offering (IPO) process. The first step for business owners is to evaluate different underwriters and select one or more of them to work with. Once selected, the underwriters work with the company to develop the required documentation (most notably the S1) and then market the shares to institutional investors via presentations (called a roadshow).

Based on demand from investors, the underwriter sets the terms of the IPO. The company then issues additional shares at those terms and sells them (typically to institutional clients of the investment bank) to begin the public trading of the stock. While the bankers are well compensated to set these terms correctly, often the stock jumps in value quickly once it begins being publicly traded or, in less fortunate cases, falls.

While some argue that such an opening day “pop” in value is good, increasingly companies are pushing back. This includes Bill Gurley, one of the most successful venture capitalists of all time, who has publicly challenged this process and advocated for direct listings.

Direct listings

Unlike an IPO or SPAC, there are usually no new shares issued to raise capital in a direct listing. Therefore, it’s typically not been a source of new growth capital. However, recently this changed with the New York Stock Exchange (NYSE) getting an SEC agreement to allow direct listings that also include raising capital. So direct listings are becoming a potential alternative to raising growth capital, though only on the NYSE for now.

The biggest advantages to a direct listing are that the process is much simpler than an IPO and it doesn’t require the time and expenses often involved in a traditional IPO. However, without the support of underwriters pitching their institutional clients, you’ll need to find another way to ensure there is demand for the company’s stock when it goes public. This is why you generally only see companies with strong brand awareness, like video game provider Roblox, pursue a direct listing.

Special purpose acquisition companies

Think of a SPAC as a “shell” company that goes public to raise money to acquire a successful private company. This may be the easiest way for a company to access growth capital from the public market because the SPAC is already public when it makes the acquisition. While SPACs have been around for a long time, they have recently become more popular as an alternative path to becoming a public company.

SPACs are unusual, and so there are a few unusual factors to consider in pursuing one:

• Sponsors: SPACs have sponsors — the group of individuals who launched the SPAC via their own traditional IPO, with the goal of finding a company to acquire. Sponsors receive 20% of the new company as founders shares, for a nominal fee — often $25,000.
• Time limit: Typically sponsors have two years to find a company to acquire and bring that company public via a process called “de-SPACing.” The first step is to agree with the target company on key terms such as valuation. Once those terms are agreed upon, the sponsors also need to get the initial investors in the SPAC to approve the acquisition.
• Debt partners: Finally, the acquisition price almost always requires more capital than the SPAC raised in its IPO. Therefore, before the new target company goes public, the SPAC sponsors need to raise additional capital. Now that the target is known, this can typically be done via hedge funds and other institutional investors providing additional money via a public investment in public equity (PIPE) transaction.

If you’re talking to SPAC sponsors, be sure of their ability to raise additional capital, and know their timeline. If they don’t complete an acquisition in the agreed-on time, the SPAC dissolves and the investors who purchased shares get their money back.

Business loans vs. equity financing

Now that we’ve walked through loans and equity financings, let’s map these back to the three growth strategies. The main decision criterion usually is the amount needed to fuel the growth plan.

In general, if you need a lot of capital, it’s easier to secure via equity than debt — in fact, some growth strategies require so much capital that equity becomes the only option. This is both because PE investors tend to think longer-term than bankers and because it avoids encumbering the company with massive loan payments. You can raise more capital with equity than with debt at any given point in time.

However, if your business can manage the necessary loan payments to get all the way through its growth curve, loans are the better option because the owners get to keep all the value of the business’s appreciation.

Table 6 summarizes key considerations to help think through the loan-versus-equity decision for each growth strategy.

Best practices for raising capital

Scenario plan.

When you think through each of the different growth capital raising strategies laid out above, there are a range of possible outcomes. If owners and the board align on executing against one or more of these, it’s important to think through different outcomes for each strategy in a scenario planning exercise. Then think about the implications to equity holders and, if a loan, debt holders, based on these outcomes.

Don’t perpetually fundraise, but continuously build relationships.

Each of the sources of capital above has folks on their teams tasked with building relationships with entrepreneurs. Business owners could fill their calendars meeting with these folks. While it’s important to constantly be in relationship-building mode, most of the time you should be clear you aren’t fundraising but are just getting to know them. To that end, you want to spend more time listening versus talking.

Also, keep in mind that any figures or financial results/projections that you share with them will not be forgotten. Therefore, less is more. Keep them interested and make sure you have enough of a relationship that when you want to raise money, you know who to call.

Always be qualifying.

You also want to constantly be qualifying potential investors. Keep in mind, as in sales, a “no” is the second-best answer. An investor perpetually telling you it “may” be interested can often lead to you wasting a lot of time. Make it easy for those who aren’t interested to opt-out, so you can focus on qualified potential investors.

When ready, run a process.

It’s distracting to raise growth capital. What you want to do is minimize the distractions and keep the timeline short. This starts with preparation. Prepare the required documentation and have it ready to share in a secured data room, which is PE/M&A parlance for an encrypted, password-protected folder.

Key questions in raising capital

Are the owners and board aligned?

As you think about the different folks who are going to weigh in on the financing decision, it’s important to understand their different incentives. A founder who has spent seven years building a company looks at both upside and downside potentials differently than an investor who has a portfolio of early-stage companies on a strong growth trajectory. This is manageable, but it’s important to make sure you understand the priorities and get the groups aligned on the ultimate growth strategy and capital required.

What are you optimizing for?

Related, everyone needs to know what you’re optimizing for with the financing strategy you ultimately choose. For example, if you choose to finance growth via a traditional term loan, everyone needs to understand the risk if you are not able to make payments — including potential expense reductions and even becoming insolvent in extreme cases.

Do you hire a banker?

Obviously, if you choose to go public via a traditional IPO you’ll need to hire a banker. However, in many other situations, it can still make sense to involve a banker. They can help enforce the timeline, have additional relationships that can be included in the pool of potential investors, and often have insights based on prior transactions that can help manage expectations and the process. There are real fees that come along with bankers, so you should be sure how the individual will have a positive impact.

Is the financier a good partner?

Especially when you talk about selling equity as a private company, the groups that you’re getting involved with are long-term partners. You need to make sure they are aligned with you on the vision for the company. However, this isn’t limited to equity partners; it’s also important to make sure the investors providing loans are folks you are aligned with.

One thing I always recommend is that as the investor moves into diligence on your business and starts checking your references, you should also ask to talk to their references. And specifically, ask to speak with companies they worked with where the deal didn’t ultimately work out. When everyone makes money and an investment works, it’s relatively easy for entrepreneurs to speak highly about their investors. However, you can really gauge the value an investor can bring from experiences where things became difficult.