25 Questions Entrepreneurs need to ask every investor
3/1/19
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Scott McGlonPresident, MP LLC
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When you pursue funding for your start up, it is expected potential investors will have many questions for you. But it is equally important for you to present thoughtful questions to them. Asking good, solid, and well-thought out questions says a lot about you. Here are 25 important questions for entrepreneurs to ask investors:
1. Within the entrepreneurs startup industry, how many investments have you made over the last 36 months?
Just get a clear understanding of what he/she knows about your market/industry. If they are new to your space, get ready to spend time educating and updating more than normal.
2. What percentage of the deals are you the leading investor?
This will give you an idea of how aggressive the investor you are talking to is and how confident they are with their own due diligence. If the lead a lot, they either have a strong history of success and exits or just focus on their formula of what to invest in.
3. How Often Should We Expect to Meet After Funding?
Some investors are going to spend more time in your business than others. What you and your company need are specific. A good investor has much more to offer than just financing, so profiting from their knowledge and advice is a bonus. Conversely, you don’t need them interfering on daily operations. Answering this question sets up expectations.
4. How Often Do You Lead Rounds?
At each stage you need a lead investor. If this investor won’t lead, you are probably going to be circling back later.
5. How Many Follow Up Investments Have You Made?
Although you may not want a follow-up investment from the same investor, it is far more efficient to get more money from the same source than starting over. If your needs/goals vary a great deal from the first round, a different source could make more sense.
6. Who Else Would Be Interested in Funding This?
Don’t leave your meeting without a lead on another investor or source of funding. If they are investing, is there an individual or company they like to co-invest with? If their co-investor isn’t a good fit, find out why.
7. What Could We Do To Improve Our Pitch?
This gives perspective on how your story-telling could improve. Your pitch deck is your most important document when fundraising and this insight could give you ideas on how it was perceived.
8. What Is your typical timeline?
Investors can be patient in looking for a very long term investment. They could have ready cash they need to deploy and get working quickly. They can also fall anywhere in between.
9. If the investor is with a group or firm, ask the investor who they would consider putting on your board of directors (if you have one yet)?
If the deal is done, who would they like to be on your board (if anyone)? Some won't care about a board seat but some will actually demand it and will be a part of the agreement. Who they recommend will have lasting impact on your direction and it’s good to know what they are thinking now. You, as the founder, will certainly have a say as well!
10. What Do You Expect This Investment to do for Your Portfolio?
Most investors are more strategic than simply wanting a return. Understanding how they expect to use your company in theirs will give perspective on how they will nudge your direction.
11. What Has Made the Biggest Difference Among Your Successful Investments?
What entrepreneurial traits, tactics or moves have made the biggest difference in their startups being weak or top performers?
12. What is your usual top concerns as an investor?
Get it out in the open so you can address it up front – it lowers your chance of getting a “soft no”.
13. What’s the First Thing You’d Want Us to Do After Closing?
This gives you the ability to get a head start and make your new investor feel good about their investment early on. It gives you perspective on what they are thinking you should do, and what they would like to do with your company.
14. Other than expectations from me, the founder(s), will there be any other expectations from key staff members?
Outside of your normal monthly or quarterly update reports to your investors, some investor will want more from other departments depending on the space you play in. From Google Analytics reports to competitor analysis to much more. Ask since this takes time if it is something that is not in your daily course of work.
15. What Will We Least Like about Your Due Diligence Process?
Due Diligence is typically very difficult and stressful. Every investor is a little different.
16. Who Else Needs to Approve This Investment?
Are you talking to the decision maker, or must you rely on your contact to communicate to the decision maker?
Make sure you know who you really need to convince and what their trigger points are.
17. How Much are You Going to Invest and Commit Today?
Be Confident. Get a figure and keep the ball moving in the right direction.
18. How Much Have You Raised of Your Current Fund?
This gives you an idea if they are meeting with you to invest, or if they are looking to use you as leverage during their fundraising efforts (to show their investors their pipeline of deal flow).
19. If operations, sales, or growth gets tough, do you or associates in your firm turn into assholes?
You might laugh but, as you have learned, people handle stress and adversity differently. One of the last things you want to manage is an irate or irrational investor partner who turns into an ass if things don't go smoothly.
20. Could You Introduce Me to an Entrepreneur of Your Portfolio That Failed?
There are two things you will accomplish here. The first is that you will show a high level of sophistication towards the VC. The second is the ability to ask the entrepreneur how the investor behaved during rough times.
21. What Percentage of Your Meetings Lead to Term Sheets?
This gives you an idea of how the investor operates, and a perspective on how many “no’s” you may expect before getting funded.
22. What Percentage of your Term Sheets Turn into Checks?
A term sheet (offer) doesn’t guarantee a closed deal. An investor may have terrible term sheets that no one accepts. An investor may have a laborious process that inefficiently pushes you to other options. Getting an answer to this question helps set your expectations.
23. How Many Follow Up Investments Have You Made?
Although you may not want a follow-up investment from the same investor, it is far more efficient to get more money from the same source than starting over. If your needs/goals vary a great deal from the first round, a different source could make more sense.
24. From the time after you complete your due diligence on a startup, how long does it typically take for you to close the deal?
This allows you to see if their timing is in your runway and know if the process will take abnormally long or not.
25. What is your follow on percentage and how much do you usually reserve for follow on rounds?
This helps you understand if this investor may be able to help in future rounds. Bottom line - does the investor have the necessary external relationships to help build the syndicate for your next round of financing? It is helpful if you land a VC that has capital to continue investing in your future rounds since this could literally save your company. Also, knowing their follow on ratio or percentage will show you their strength in getting you funded until you no longer need it!
A few other questions you may want to ask could be around their personality - their family, hobbies, and favorite sports/teams for example. I hope these questions help guide you through the fundraising process and give you confidence that your questions are just as important as the investors questions. Many young startups are so anxious to land funding, they don't take the time to really understand whether or not genuine synergy is there between the founders/company and the investor. You will have enough challenges in building your business. So, don't create one unnecessarily! Good luck.