As a founder, asking certain questions prior to taking money from an investor is a must-do for several reasons:
But what are the right questions? Well, those that get you the right answers. See what we did here? Here are five questions that will help you avoid empty answers and make informed fundraising decisions.
It is very frequent to hear investors saying they'll add more to the business than just money. One of the easiest ways to know if that is true or not is to know how much time they're dedicating to other portfolio companies today. Most investors are not new to startup investment, and hopefully they've learned something in their previous experiences - which should translate into valuable knowledge that can make you save time and money.
But like with most relationships, there is an art to interacting with each investor and to use this opportunity at our favor. Although we can not offer a How to Interact with Investors guide that works with all of them, we can certainly tell you this: whatever follow-up routine they have with previous founders will likely be not too far from the one they'll be willing to have with you and your company.
Now, how frequently should investors interact with their portfolio companies, anyway? Well, at least monthly seems to be the bare minimum, usually shortly after an update on the previous month sent by the founders. If it's a particular stage such as right after closing a deal this will likely happen more frequently, as investors help close the final details on the strategy to use funds. This higher frequency also applies on the side of the cycle, when the company is actively working to close the next financing round.
As a complement to the prior question, investors who are able to add value to your company will proudly - and naturally - share some examples with you of things they've done in the past to help their portfolio companies.
Remember, some investors were entrepreneurs themselves, which means they gone through the whole process of fundraising, business model validation, go-to-market, growth, and may have even collected some interesting exits.
Another thing you'll likely want to know is how valuable their network is for your business - and how willing they are to use it for its benefit.
There are so many reasons you should ask this question before closing a deal that we don't even know where to start.
First of all, name one business relationship that hasn't benefited from transparency, clear shared goals and managed expectations. You can't. Which is why you should confront your investment vision with your potential investors as soon as possible.
Secondly, you will save a lot of time, misunderstandings and frankly emotional baggage by doing this before involving lawyers into the whole investment agreement back and forth avalanche of emails. Do everyone a favor, but especially yourself, and set clear guidelines on what is expected from this investment.
Lastly, and although a startup path is usually marked by several unexpected turns, by agreeing an investment vision between you, your co-founders and investors, you're also facilitating the whole process of strategy definition. This strategy is then reflected in your monthly goals, which are the closest thing you could have to a focus, which will on the other hand get you rid of uncomfortable, easily time wasting, emotional discussions about vision while you're already burning cash.
We could go on nominating other benefits, but we think you get the idea.
First of all, remember to filter and validate the answer to this question, no matter how many PhDs or number of successful investments subscribe it. Everyone will have a different opinion about this, and you'll go crazy trying to follow everyone's advice - as will your team's focus.
Besides, what's a better way to show commitment to success than to directly ask what's wrong with the business, on their (hopefully) experienced view?
In fact, making this question also says a lot about how open you will be during the time you'll work together. Of course, you have to mean it... We're not just giving you a list of questions to ask investors, but more of a tangible reflection of the right attitude to bring to an investment commitment.
References. The first thing you surely should do after getting answers to all the previous questions is to check their veracity with founders that have already worked with these investors.
The openness shown while answering this question will also be of added value: if they get offended by the question alone, that may not be a good sign. On the contrary, investors should see this curiosity as a proof of your objective and mature way of doing business, which will surely come in handy along the way. In other words, they should feel safer with such a diligent business partner.
Do not close the deal without having talked to founders from at least two other companies previously invested by the same investors, and be smart about the questions you make them too. Now that we're thinking about it, that's a great idea for a next article.