Interested investors are known for and expected to be bombarding founders with questions during due diligence, but start-up founders should ALSO be asking the questions – and not just one or two…Robert Hokin, Greenbackers Managing Partner explains.
When we at Greenbackers host investors pitches, we always take pains to prepare start-ups with answers to any and all kinds of questions that investors might pose during the heat of the Pitch, from market-size to competitive differentiation to traction metrics.
Part of that preparation, but commonly ignored by many is: “what should YOU as a start-up founder be asking of potential INVESTORS”?
After helping many hundreds of founder teams, we still observe an imbalance between investors and founders. It often seems that the investor is the only one who is “supposed to” ask questions during a pitch. That shouldn’t be the case.
Given that it’s sensible to begin any business relationship on equal footing, I’d like to propose that, as a founder, you should also be asking questions. In fact, a LOT of questions. Think of any investment as a marriage, a civil partnership. Would you marry someone without learning all you can about the other person? Well of course not! So, during any meeting with potential investors, try to carve out time during the conversation to ask questions that help ensure that the investor is an ideal fit for YOU.
Remember: it’s not only about the investment deal details–right valuation, right terms, right amount of cash–but also about your personal fit. Ultimately, you will be working together for several years through ups and downs, thick and thin. You want to get this right!
Here are a number of what Greenbackers consider some key questions that founders can ask potential investors:
- How are you unique as an investor or a fund?
As you know, or certainly SHOULD know, most start-ups fail. To give your company the best chance for success, you want an A-lister in every position. Most investors may have a special skill set (e.g., marketplace development, marketing, licensing expertise) or a particular network they can use to support you during your journey. Understanding that up front is key.
- What’s it like working with you and your firm?
Try to learn as much as possible about the day-to-day relationship with your investor. How hands-on and active are they? Do they simply join in for board meetings? Best to make sure their working style suits you.
- How can you help us, besides investing money?
As in question 1, good advice or experience can be worth thousands (or even millions) of dollars, pounds or euros. To leverage that, check whether, what and where your investor can add value–and more importantly are they prepared to.
- How do you make investment decisions?
This is a question that so many neglect to ask. What is the actual investment process from start to finish? Will the investor decide on their own, or must you (or they) also persuade other people, i.e. an investment committee or committees, that your company is a potential investment fit? This question not only gives you insight into their processes but, most likely, also about different factors that will be considered in the decision.
- How many investments have you made in the last six months, what is your target for the next year?
It’s actually important to know whether an investor is actively investing at the moment! You don’t want to waste time pitching someone who won’t invest in the end. Or a fund that has committed all their capital. This answer may also provide you with a deeper understanding of the investor’s areas of focus. Even if they are not active, if you impress, they might look at you in a future round.
- What do you expect from start-ups you invest in?
Unclear expectations are usually the most common reason for conflicts. It’s critical to understand what the investor expects from you while also clarifying your own expectations for the partnership. This can cover reporting, board meetings and governance issues.
- What do you look for in start-ups and teams?
Understanding what matters to the investor helps you guide future conversations and double-check for investor-founder fit.
- What’s the most significant lesson you’ve learned as an investor?
This question may help you understand more about the journey an investor has taken. This can also provide some insight into an investor’s decision-making in the future.
- What was your best investment, and why?
This question will provide a sense of what motivates the investor. Does she only see the financial returns or also other aspects of the deal, such as working with the team or changing something for the better?
- What was your worst investment, and why?
It is absolutely 100 percent normal to mistakes as a founder. Investors also make mistakes, and you can gain enormous insight from asking this question. Maybe one to hold back for a second or third conversation, though.
- Can you share contact information for two or three founders you’ve already invested in?
Checking references is not only a sound practice when hiring employees and partners, but especially for investors. Other founders will hopefully share their independent opinion about working with a specific investor and could provide a candid view of their value-add. Don’t miss out on any opportunity to engage in this way.