Investors are choosy where they put their money and an entrepreneur needs to be just as careful who they allow to invest in their company. You will likely be working with your investors for many years, so study the potential investor as deeply as you do the terms of the investment. Asking potential investors the right questions, before they invest in your company, will pay off with higher returns in the future.
According to Andrea Zurek, a founding partner of XG Ventures, “It's just as important for the entrepreneur to choose the right investor as it is for the investor to select the right entrepreneur. It's more than just speed dating for the right investor, it's finding someone that if you were literally stranded in an airport for hours, you would truly get along with them. Building businesses is personal, and raising capital is also an investment in human capital.”
1. Is the investor well connected? The business case for a well-connected investor is compelling. Investors with extensive networks can help both of you get a positive return from the investment. A study from the Sloan School of Management found it is not only the number of contacts that a person has but also the closeness of those contacts that will result in increase in revenue and completed projects for a business.
Your business will benefit from an investor willing to share their network and bring on other investors to your company.
2. Is the investor working on projects related to the business? It is important to know the other projects your potential investor is working on, advises Jayson Demers, CEO and founder of AudienceBloom. The relevance of the potential investor’s current projects is a vital element in establishing a more stable working relationship between the founder and investor.
If possible, choose an investor whose projects are related to your business. That will help you to build a stronger and lasting partnership that increases the value and stability of your company.
3. Does the investor understand your business? According to Mohr Davidow Ventures, entrepreneurs are better off with an investor who understands the business model and has experience in the industry. Pay attention to how much information the investor requires about the business model to understand it. Check out the investor's area of focus and current portfolio to assess how knowledgeable is he or she about your business and industry.
Ben Legg, Adknowledge CEO and active investor via the Adknowladge investment fund said, “Ideally an investor will be good at pattern recognition and transfer, being able to take learnings from their other portfolio companies and turn them into useful advice and benchmarks for you. This could range from your KPIs/dashboards, to how you use data, to how you build company culture, to how you think about customer lifetime value.”
4. What does the investor expect dealing with your company? Experienced investors do not offer funds to a budding company before researching how the company works, reviewing and analyzing financial performance and evaluating references. You must do research as well. Ask your potential investors what they expect and what they plan to do to increase the value of your company.
Bring up questions related to expectations so both parties will know if their future plans and projects match. Being on the same page will aid both parties to achieve their desired outcome with the investment.
5. Is this an active investor? Some venture capitalists are known to take investment meetings even when they lack funds. Michael Berolzheimer of Bee Partners advises entrepreneurs to work with an investor who has made an investment within the last three months.
There is a good chance an investor who has not invested in any business within that period does not have enough funds to invest in your business.
6. What are the factors and criteria for the investment? Learn what factors and criteria the investor considers before making an investment, advises Grow VC Group. That will guide you to determining which stage of your business the investor is willing to fund.
Furthermore, it’s important for entrepreneurs to know the typical funding schedule, routine, or standard lifecycle of their particular investor is as well.
As David Blumberg of Blumberg Capital explains, “Entrepreneurs need to understand the VC business model and the context of the fund. Find alignment ahead of time about future funding rounds—whether the VC has a model for follow-on rounds of financing, or helping successful seed and early stage companies find later stage investors to finance the expansion and growth stages.”
Blumberg also advises that entrepreneurs look at where the fund is in its lifecycle and when investors will want an exit and return of capital.
“Align on the goal of what type/scale/timeframe of exit is acceptable to all,” Blumberg says. “Moreover, an entrepreneur should do diligence on the venture firm and the partner that will take the BOD seat. Speak to other companies that have taken investment from that VC firm— successful and not. Does the investor make time, when needed, to advance critical milestones, without being too intervening? How helpful was the investor on business development, financing, recruiting, strategy, product, M&A, etc. And always ask if they pass the “Don’t invest with jerks” rule.”
The investor might be interested in funding are product launches, concept or first customer contract, as examples. Choose the investor or investment group only if the presented funding strategy matches yours. If your needs don’t match, move on to another investor.