In part 1 of our series “11 questions founders should ask potential investors (part 1/2)” we discussed the first five questions founders should keep in mind when talking to capital providers.
Let us recall: Unfortunately, many founders fail to pose critical questions to their business partners from VCs, business angels etc. But potential capital providers appreciate being given the impression that the founders proceed cautiously, are interested and skilful and do not just regard the investors as inactive capital.
Discussions at eye level and not answering the question of required capital with a pointless “maybe” – these are just two of numerous advantages of appropriate questions in a conversation. This part 2 provides you with the next six questions.
6. Which was the most recent company in which you invested – and why?
This is a simple, but a very pertinent question. It allows you to verify how fast the investor replies, how enthusiastic he is – and when the last investment was made.
The answers can tell a lot. If the last investment was made a long time ago, the question arises what is behind this. Has the investor already exhausted his budget for this year or has he run out of capital for further investments? If this is the case, ask for the number of planned investments this year and next year. This will give you the answer.
Do you also want to know why an investment was made? What prompted the investor to enter into a participation? Was it an amazing founder, a vision, the market or something completely different? Listen closely to what he says. This should be helpful to find out what the investor is looking for in your start-up as well.
7. Have you already invested into a competitor or are you considering to do so?
You should definitely ask this question because regrettably, some investors will not reveal this information themselves or even be aware of it – unless you ask.
If an investor has already invested in a competitor, even if it is not a very close one, the probability of a participation in your company is zero. VCs do not invest in competitors and business angels also avoid this. This is because it is much more difficult to help two companies in a meaningful way and wholeheartedly if they compete with each other. Each individual action can create a potential conflict of interests.
If an investor has already invested into a competitor or is planning to do so, this is often a subtle issue. Venture companies often plan to invest in a market without knowing beforehand which company they will choose. This is why they collect as much information as possible from all competitors. In this case the VC just tries to identify the potential candidate in the market.
Or you are called up by an employee of a VC who claims being interested in shareholdings in the market segment of your start-up and wants to discuss this issue with you.
On this occasion, many detailed questions are put forward, sometimes touching the due diligence process – with the result that the VC invests into a competitor and just wanted to get as much information as possible about the competition – i.e. from you.
This may sound unfair to founders, but it is regular market reality. What is good about this, however: The problem is very easy to solve. To save time and avoid being hurt, you should ask or investigate immediately whether investments in competitors have been made or are planned. Even if this is no hundred percent guarantee – it helps.
8. What are your concerns about our business?
“What would be the reasons not to invest into my company? What do you consider to be a risk? What do you think will not work?” By asking these questions directly, you achieve several objects at the same time.
To begin with, you signal openness and appreciation for feedback. Secondly, you prove that you respect the investor’s opinion. This is also an important indicator of how working with you will look like (from the perspective of the investor).
What is even more important, however, is getting precious information from the perspective of an investor assessing hundreds of companies each month. The concerns can reach from market size over sales channels up to competitors and pricing. These information can help you to detect issues of concern and tackle them during the further course of the investment process.
9. What does your follow-up strategy look like?
Some investors closely monitor their investments and possibly even invest more money into the companies. Some do not. Both strategies are perfectly legitimate – but it is important to know which strategy is being pursued.
Most start-ups need several financing rounds before entering series A and most of the capital generally comes from insiders, i.e. investors who already have made an investment.
Especially if you are collecting money from different business angels and most of your funders do not want to continue investing, you could have a hard time and it will be difficult to complete a second seed round, Most start-ups need several financing rounds before entering series A and most of the capital generally comes from insiders, i.e. investors who already have made an investment.and know your start-up very well. If most of these insiders are not willing to invest more, you must actively go outside to raise more capital. The rule is: “After financing is before financing.” This can be rather difficult, especially if you are in a post-seed phase, but have not entered series A yet.
With VC companies, however, it’s a different kind of dynamic. Some VC companies invest smaller amounts of capital in the initial phase to lead the series A later on. However, there is a potential problem founders have to recognize in good time. If the company decides later on not to lead the series A this could be a negative signal for the rest of the market. It pays off to network with other founders the company also supports to get insights into the development trends.
10. Which backup can you offer to companies?
Many investors talk about offering added value and assistance besides money. So you should ask how exactly an investor intends to help and also enquire about exemplary supported companies in which the investor already holds an interest.
Some investors convince with a massive network. Some bigger VC companies will help you to recruit and scale. Some smaller business angels are great in pricing and financial modelling. Some investors know much about sales and marketing. Whatever it is: Investors like to be asked – and their answers are always helpful for the founders.
11. Can you name some of the founders you support and can I talk to them?
Just as investors should check founders, founders should check investors. When the opportunity arises, ask for 2 or 3 founders with whom this investor has already cooperated.
It is not absolutely necessary that you talk to others after meeting the investor, but it is a good question and in any case interesting to hear the answer. Big investors will possibly enthusiastically name some founders they supported. Minor investors might hesitate to mention any specific names. Either way this question raises you to eye level again and can create a very positive atmosphere unexpectedly.
These were the 11 questions you can ask potential investors. We hope we could inspire and ideally convince you to make active and even quite critical inquiries in investor meetings. Investors for their part will find it refreshing to clear up important questions at an early stage and will remember your round of questions. Are there any specific questions you would personally like to ask investors? Let us know.