The second in a series of two posts for start-up CEOs
In our first article about potential investors in your business, we shared how to initiate an investor search. We focused on the first steps and initial questions to ask. Here, we delve into the critical must-knows. If your investor can answer these successfully (as in, you like what you see and hear), you may just be on the path to a successful first round of funding.
From CEO to investor:
"What excites you about the problem we are trying to solve and our business approach?"
It's not enough for the investor to commit money, which is a one-time transaction. You need the investor to commit to the business. Ensure they share the same goals and vision for the business. In some cases, if the investor's only goal is to include your company in a roll-up of multiple companies, it may not be in the best interest of you or your company.
"What is your opinion of our founding team?"
Ask the investor what he or she perceives as strengths and weaknesses. This reveals the investor's commitment to the current status of your company and its team. It also alerts you to whether the potential investor can help in functional areas. It's not uncommon for an investor to strongly suggest replacing members of the founding team with people in his or her network. Remember, as soon as you take the money, the investor may have a strong say in what happens.
"How much money do you have?"
This question may seem intrusive, but it's important to the future of your relationship. Ask the investor about follow-on investments, and how much is the maximum that may be committed to any one project. You want to partner with an investor who can handle one or two follow-on investments.
"How involved do you like to get?"
This is critical. Both parties must understand mutual expectations. You don't want to accept a check from someone who you thought would be a passive investor wanting only periodic updates vs. someone who:
- constantly wants to meet with company personnel
- reviews day-to-day operations meetings
- wants to engage with every key customer project.
If you seek an active investor, ask for references. Investors can help the business grow faster but only if they are working in concert with the CEO
"What is your investment timeline?"
Most venture funds have a timeline, guidelines and expected returns all of which place limits on the amounts and timeframes for new capital. Be sure that you and your potential investor agree on the same horizon and timeframe. Are they looking for an exit within the first year or do they have a long-term exit plan of five years or more?
"Can you refer me to entrepreneurs you've worked with in the past - both successful and failed?"
Here you can discern how an investor engaged with their other portfolio companies--the winners and losers. You want to hear their references tell stories of persistence and support in tough times. Conduct blind reference checks as well. Find portfolio companies that were not recommended as a reference and call the CEO or founder. It's difficult to inquire but you'll be glad you know how an investor handles struggles.
"Which investment has been your biggest disappointment?"
Things go wrong. It happens. Discover what an investor does when there is disappointment and difficulty. Determine what they do (and did) to help. In retrospect, was it a bad investment? What would they have done differently?
"What are your top three expectations from a startup CEO?"
The CEO works at the pleasure of the board and that person can be removed at any time. Clarify how CEO success will be measured. Make sure what you hear is clear and well defined. It will ensure future success with your company.
"Ask for advice about something that keeps you up at night."
Every start-up faces a swirl of stresses. Ask the investor for advice about a real problem at your company. Was the investor's advice thoughtful? Were questions asked before an answer was given? What about follow-up questions? If you're not happy with the quality of advice you received, be concerned.
"In your experience, what are the top three reasons an investment fails?"
Even if you do not select this investor, this is great information to have as many different ways as you can get it. It will give you vital things to consider for your own business. Inquire about projects in which the investor did not offer follow-on funding. Why and why not? What happened to the company? This reveals the investor's commitment, risk-tolerance and personality.
In the end, answers to these top 10 will tell you most of the story about an investor. What's key? Understanding the investor's motivation for investment, measurements of success, and how they have dealt with successful and less than successful companies in the past will inform your decision regarding an investment. Ask the hard business analytical questions as well as the emotional intelligence questions and you will find the right investment partner for you and your company. And finally, always trust your instinct.
Remember, it's your company and your future. The decision is all yours. Keep going. Keep growing.
Co-founder of Austin-based Growth Acceleration Partners (GAP), Joyce Durst is driven to help software companies achieve rapid growth through business-focused applications. Joyce has launched startups and led teams at enterprise companies by applying her passion and business knowledge to efficiently create software that solves business problems. Active in the community with Special Olympics and Springboard alumni, she enjoys helping other women in technology to achieve their dreams.