15 questions Start-up Founders should ask Investors
Are you surprised by the title of this article?
It is a general thought that it is the investors prerogative to seek answers from the startups they wish to fund. However, it is equally pertinent that founders of startups to ask the right questions to check if the investor measures up to their business requirements.
A little time spent in asking investors the right set of questions goes a long way in minimising your chances of wasting precious time with those who would eventually not invest and instils confidence in the investors as well. It shows you in a good light and reflects your thoughtfulness while also helping you qualify the investor.
So, let us turn the tables and talk about the top 15 most pertinent questions that founders need to ask investors.
1. Do you bring any value to add to the table beside the funding?
Perhaps the first thing that you should be asking a potential investor is what value-add the investor may bring in addition to the influx of funds. Ask how exactly an association with this investor would benefit your company and its goals and vision. Asking for specific examples referenced to other companies the investor has backed would be a great way to start.
You would find that while some investors may bring with them an excellent network, some others may help you recruit the right talent to scale your business and yet others may help you with marketing or business development, supply chain and distribution, or even pricing models.
Check out if the investor is open to customising their offer or believes in a one-size-fits-all model.
2. What is your investment process, and how long does it typically take to close?
Next, you may be interested in understanding the typical investment process that the investor follows, as this is something that significantly varies from one investor to another. So, ask about that – check how many meetings are needed, what is the due diligence that would be required, reference checks, presentations, etc. Also, enquire the duration of this process.
3. What ‘check size’ can I expect?
Another important question that would be worthwhile to check is the amount of funding that you can expect, in case you are successful. Knowing the ‘check size’ would help you decipher the timelines and accordingly help you decide on the efforts that you should be putting in for this particular investor. Of course, it would make little sense if the investor dabbles in small check sizes when your requirement is a million-dollar of investment! A clarification on the exact size or even a ballpark range of checks will help you understand the investor’s experience with seed funding.
In addition to ascertaining the check size commitment, you may also check with the investor on their expectations about owning a percentage of the business.
4. What are your investment plans for the year?
Next, check with the investor on their investment plans for the year and ahead, i.e. how many investments they plan per year (called pacing in financial parlance). You may find it surprising to know that the investor may not even be actively investing or may also be cash-deficit and are just checking your business as a potential investment avenue! On the other hand, you may come across an investor who is actively investing and has a disciplined investment strategy in place – in which case such an investor may be harder to get through. So, this question will give you some inkling about the investor’s capacity, save you time on a lost cause, and of course give an indication of your chances of getting through with the investor.
5. Who are the approvers needed to be involved in this decision to invest?
It is imperative (and somewhere time-saving as well) to understand who the real decision makers are and if you are talking to the right person. If you are not, then you may just as well be wasting a lot of your precious time. If the person you are in talks with is among the decision-makers, then you must know who the other approvers are, what are their triggers and if and when you can meet them. The answer to this question is critical for you to progress on the path to obtaining a YES. Be sure that you get to meet everyone involved in the decision-making process to impress the business upon them and pave the way to a quicker and better investment.
6. Which was the last business that you backed, and what drew you to that business?
A simple question that helps you test the interest level of the investor and their experience and understanding of your market space. Knowing the answer to why the investor has chosen a particular business to invest in is equally important for it helps to figure out what precisely the investor is looking for in your company.
7. Have you invested in our business space, especially in any of our competitors? Or, are you contemplating such an investment?
This is indeed a critical question, and most investors will not divulge this till you prod them for an answer. But this question is pertinent and one you should go for sure. Firstly, if the answer is a ‘Yes’, then your chances of getting investment are almost negligible as it is against the general practice to invest in competing businesses.
Further, sometimes, investors are just checking the market space to see potential investment options, in which case they will reach out to your competition just like they do to you. Though it makes business sense from their perspective, it may seem a waste of time for you if ultimately you don’t feature in your “want to invest here” list!
8. Do you have any particular concerns about our business?
This is an excellent question that founders are suggested to ask potential investors. It is essential to know the risks that the investor sees or perceives in your business and helps you mitigate these concerns in a better way during the investment process. Plus, it also gives you a fresh perspective of your own business and enables you to understand where you may be going wrong. It also shows your openness to feedback and change.
9. Do you have a follow-on strategy in place?
While many investors are happy to follow on and add more cash to the start-up’s kitty, others just don’t after the initial round. An understanding of which strategy this investor approaches the funding with will help you ascertain your position at the time of the second seed round.
10. How often are you expecting us to meet after the funding is in place?
It is good to know your time investment with the investor. Asking this question helps you gauge their attitude towards management and monitoring. It enables you to understand the demands of the engagement better.
11. What are your expectations for your portfolio from this investment?
An apt question! Knowing their expectations from this investment is vital for them as well as for your business. So, ask what they are expecting to get out of this deal besides a good return. The answer will help you understand if your business meets or can meet these expectations. Understandably, you get to know whether you can deliver in line with these expectations or should you turn down the offer.
12. Is there something definite that you have in mind and would want us to do if we work together?
This question will help you set your expectations straight. You will get to know what their expectations from you are, once the investment comes through. It will also reflect the seriousness of the investor as someone serious would already have a strategy or the glimpse of a plan in place already.
13. Could you help me with some references from previous companies you backed, and can I reach out to them?
Remember that reference checks work! Just like an investor would do reference checks for you, it is equally pertinent that you too do your homework. Ask the investor for at least 2-3 references of founders whose start-ups the investor has backed. Also, it helps you gauge the depth of the investor for a great investor would have some flattering references, while others may even be reluctant to share one!
14. Are there any entrepreneurs in your portfolio that failed? Could you introduce me to one of them?
You must be wondering why you should ask this question? Indeed, this question has a two-thronged benefit – you come off as a sophisticated person and the second more important one is that you would get to speak with an entrepreneur who would have a first-hand experience of the investor’s attitude and outlook during difficult times.
15. Are you interested in investing in my business? If yes, what next steps would you suggest?
Sometimes the direct route is the best. So, don’t be shy to ask, if the investor you would be meeting, is potentially interested in investing in your company. An excellent way to end your first meeting is by asking upfront if the investor finds it of his interest to invest in the business. By this time, the investor would have already made up his/her mind, and the answer would give you a good indication of where you stand after this first meeting.
Choosing an investor can be a tricky business. Asking these questions and setting your expectations straight can help avoid surprises. After all, investors choose winners, so why not the other way around?