Answer These 6 Questions Before Sinking Money Into Some Entrepreneur's Great Idea
If you thought being an entrepreneur was tough, then you’ve never lived in the shoes of an investor. Whether you’re a VC or angel, investing in startups is risky business. That’s not saying that if a startup fails you’re out on the streets. It just means that if you don’t pick any winners, it’s time to find a new line of work. Investors are in the business of founding a startup in the hope that it becomes successful - which will also make them a hefty return in the long-run.
While certain factors are out of our hands, such as an economic downturn, we do have the opportunity to make sure that we’re at least investing in the right startup. And investing in a potentially successful startup all begins with the entrepreneur behind the whole thing.
Before committing any amount of money to a promising startup, here are a few things you should keep in mind to make sure you're going to be working with a great entrepreneur.
1. What kind of experience do they have?
As John Rampton pointed out in Entrepreneur, “Investors don’t want entrepreneurs to make mistakes on their dime.” This is why it’s most advisable to do your homework on entrepreneurs. We need to look at their business track-record and determine if they are expert in their industry. For example, would you want to work with a police officer on a business venture that involved baking? Or, would you rather work with that police officer on a product that improved vehicular safety?
In short, you don’t want an entrepreneur to learn as they go with you funding it. However, if they have the knowledge in an industry and experience starting a business, they have the chops to handle the day-to-day business operations.
2. Are they a good storyteller?
While a workable idea and solid business plan are important when selecting which entrepreneur to work with, the ability to communicate is arguably their top selling point. An entrepreneur needs the ability to emotionally connect with investors, customers and the media. A great storyteller can select the right story for the right audience. Furthermore, they can engage with the audience, motivate them with a strong call-to-action and actively listen.
Martin Zwilling mentioned Howard Schultz, founder of Starbucks, and Chad Hurley, founder of YouTube, as examples of great storytellers because they each turned "'me' into a 'we,' by being able to tell a story that shined the light on an interest, goal, or problem that both the teller and the listener shared."
3. Can you trust them?
David Rose, founder of the New York Angels investing group and CEO of investment firm Gust, was asked what he thinks is the number-one quality to look for in an entrepreneur when investing. His response was integrity. He said there are many things that an investor can’t control, so being able to trust an entrepreneur is something they need on their side. In other words, you want to be assured that the entrepreneur isn’t just going to take the money and run, or give-up when times get hard. They have to have a foundation of integrity and hard work to make their idea reality.
4. Does their business plan answer the three C’s?
Many years ago, Cliff Ennico, who was the host of the PBS reality series MoneyHunt, reminded entrepreneurs to have a business plan that included the "three Cs," which consisted of:
- Compelling idea - It should be obvious why people in a specific market would purchase the startup’s products or services.
- Competent management - The team must be talented and understand the business.
- Cash flow - Revenue have to be sufficient to take care of the basic operating expenses.
If an entrepreneur has taken the time and allocated the resources to satisfy these areas, it illustrates there are conscientious people behind the idea. Then you can feel a bit more at ease before signing a check over to them.
5. Are you familiar with their niche?
"As you probably know, investors want to minimize their risks as much as possible" says investor and entrepreneur Qais Al Khonji. "That’s why so many investors aren’t too worried about supporting startups that are involved with software or healthcare industries," for example, because these industries have a big audience and potential for profit.
On top of those sort of industries, you consider working with entrepreneurs that you personally know, such as a former colleague, or someone who has been personally recommended. Entrepreneurs who pitch ideas in a field you are familiar with are worth listening to, since you and that person have similar interests already.
6. Would they be good to work for?
Even as an investor, you have to ask yourself if the prospective founder is someone you would want to work for. Can the founder convince, and inspire, prospective employees to give as much heart and soul as possible to their venture?
These are people who may lose their job if the company fails, but still deliver a high level of dedication, even though their actual level of monetary investment may not be all that high. Investors look for founders who can attract and keep such employees. Marco Benvenuti, co-founder of Silicon Valley hotel-industry startup Duetto says giving employees a sense of purpose has helped them attract talent.
"Having a sense of purpose is important," he says. "The engineers train extensively on the product and how it works for our customers. Giving them the full context allows them to build and produce features that deliver tangible benefits for clients."
One key to any business is the entrepreneurs behind it. Finding them can be tough, working with them and investing in them can be even more of a challenge. However, if you make a careful and considerate examination of entrepreneurs who are seeking funding, you will find one who fits your interests, goals and personality. If you're going to spend years of your life interacting with someone, be sure you give them a thorough evaluation. After all, in the end, it's your time and money at stake.