Of course, as a founder, you should be ready to give honest and concise answers to potential investors. This includes information like your future plans, current metrics, and the story of your brand and business.
However, founders rarely think of what they should be asking or learning about investors. Of course, this makes sense when you consider how many businesses seek funding, and how few get it:
Every year, about 500,000 new companies are founded in the US. Out of these, venture capitalists invest in less than 1,000. This means that the vast majority of companies that try to receive funding won’t get it.
However, as a founder, you should always look out for the best interests of your startup from every angle.
Here are some questions that you could benefit from considering when it comes to potential investors.
What do they offer besides money?
Especially if you are new to the world of courting investors, this might seem like a very strange question. After all, isn’t the whole point of investors that they offer money?
Yes and no.
The truth is that some investors can offer more than money. They can offer powerful connections and guidance that can help your business grow.
One rising trend in VC we have seen over the past several years is that of the solo venture capitalist, who startups may prioritize due to their own personal records of success.
When possible take a look at each VC’s thesis. Also, be sure that you know what their values are and where their money is coming from. Working with a VC who you have fundamental misalignments of values with could potentially be a recipe for issues down the road.
What are their connections with other VCs?
This is important because VCs could potentially offer you connections that could help with your startup’s future growth. This could include links with other VCs.
This is something that you could ask potential investors about. Say you want to learn more about their ties with other investors.
In addition to asking, something else that you can do is look at the funding rounds of other companies in a potential investor’s portfolio. Do you see evidence of consistent and favorable collaboration?
You can also try to directly contact some of the companies in their portfolio and ask them about their experiences before making your decision.
Another smart thing to do is to try and work with VC’s that are already involved in the industry that your startup is a part of. Or, think globally. If you want your company to expand globally, a VC with global connections would be a good match.
What is the VC’s style?
This is incredibly important. Do you want a VC who will just give you money and run, which gives you the freedom to operate how you see fit, or do you want a more supportive and mutual partnership?
Unfortunately, it is not unheard of for VCs to make all kinds of promises and then more or less vanish after startups sign on.
This is a common problem across industries. We have all heard of musicians, for example, who sign on to a label and then basically never receive any support from them.
This is why you simply have to do your homework.
Again, if you want a more hands-off VC, working with a firm or person who wants to be deeply involved in your business is a recipe for disaster.
However, if you sign a contract expecting certain kinds of support to help your business grow, because you were told you would receive it, and you never do, this is also an awful situation.
Getting to know a VC before you sign on is a great way to mitigate these issues. First, look at their public track record. If their public track record matches up with what they promise, that’s a good sign.
It is easy to see in terms of public records whether a VC has actually helped their portfolio companies grow or not.
Another important thing to do is to reach out to companies who have worked with them in the past and find out about their experiences. Talk to their current portfolio companies as well.
Does an Investor offer both brand recognition and support?
Brand Recognition can be a big deal. For example, if you announce a raise with a strong and well-known VC at the forefront, their stamp of approval can mean a lot. It can generate interest from both the media and other investors.
One great example of this is Adam Neumann’s latest yet-to-be-launched prop-tech startup Flow. When VC firm Andreessen Horowitz cut him their biggest check ever, it caused a media firestorm.
However, brand recognition is not everything. In some cases, it may benefit a startup to choose a smaller VC.
For example, a large established VC firm may be working with a number of businesses at a time. And, if they don’t decide that you are one of their star players, you may not get the support that they promised.
While smaller firms often lack the same level of brand recognition and connections, they are often hungrier to succeed and prove themselves. This means that they may offer better support.
Ideally, you want a combination of both name recognition and genuine support.
Are you thinking long-term?
When it comes to your business, it is critical that you have a long-term plan, and think far past today. Ask yourself these questions:
Where do I see my business going over the next few years?
How do I want to expand it?
Where do I want new business to come from?
This is why understanding a VCs values, their track record, and the source of their funds is key. You are hopefully not just looking to receive money today, but an invaluable partner throughout the lifespan of your business.
Some Questions That You Can Ask an Investor Directly
Especially if you are new to this, you might be wondering how exactly to go about asking VCs critical questions. Here are 5 things you can ask, and why they work.
1. What is the most important lesson you have learned as an investor?
At the core of every business are people, their experiences, and the decisions that they make. This will help you get to know more about the perspective and individual journey of a VC. This may be critical in getting a feel for what types of decisions they make and why.
2. What do you consider to be your best investment so far? And why?
This will help you see what truly motivates them and what they consider to be a success. Take note if these things align with your values.
3. How do you make investment decisions?
This can give you insight into their process. Do they work with other partners who they will have to convince, or do they work alone? There can be pros and cons to each. It will also give you more information about what factors they consider most important.
4. How many investments have you made in the past 6 months?
If an investor is not actively investing at the moment, the chances of them getting involved with your company are probably quite low. You don’t want to waste valuable time pitching or jumping through hoops for people who are not actively investing.
On the other side, learning more about their recent investments can tell you a lot about their area of focus and what they value.
5. What are your expectations?
Communication breakdowns are one of the biggest reasons why people run into problems in business. Collaboration is not always easy.
You can do your part to mitigate them by asking clear and concise questions. If you feel like you get clear answers to your questions and everyone is on the same page, this is a great sign.
Final Thoughts on Choosing an Investor Wisely
There are some big misconceptions out there when it comes to working with investors, like:
There are some big misconceptions out there when it comes to working with investors, like:
There are some big misconceptions out there when it comes to working with investors, like:
- Founders should take any money they are offered without asking questions because funding is so scarce
- VCs only offer money
- The bigger the VC, the better
Hopefully, this post has been helpful for all the founders out there!
Remember to always put your business first.
What do you think? Comment below.
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