11 Questions Founders should ask potential Investors (Part 1/2)

In one of the previous articles, we discussed which questions investors often ask in conversations with founders – and what homework the founders should, therefore, have done. In this week we turn the tables. We talk about important questions the founding team should ask the potential investors:

Unfortunately, most founders fail to pose critical questions to their business partners from VCs, business angels, etc. This is a pity, for potential investors appreciate being given the impression that the founders proceed cautiously and do not just regard the investors as walking wallets.

Moreover, by posing the right questions founders can maintain attention, arouse interest and avoid being given a vague “maybe” answer by investors later on. By asking critical questions and insisting on clear answers, one can ultimately avoid wasting time with investors who do not really intend to invest. In this article, we discuss how eleven important questions could look like.

1. If you invest in my company, what would be the next steps?

The first meeting with investors should never end without posing this question. Be frank and do not be timid. Ask this question before the meeting ends, irrespective of whether you are talking to a business angel or to a VC. Every investor will make a principle decision already at the end of the first meeting.

However, investors will not take a concrete investment decision, this hardly ever happens during the first meeting or at least very rarely. But most likely, the investor will decide whether to pursue the project or not. Some investors will want to continue the conversation – and that’s all right basically, but it means you lose more time.

By posing this simple and direct question, you will learn precisely how things stand. If the investor wants to continue talking, ask him about the next steps and possibly ask for a concrete follow-up meeting to be agreed directly during the conversation.

If the investor says for example “Keep me updated” or “I will be traveling over the next weeks” or “There are a lot of things I am working on”, this can be interpreted as a gentle “No” or as an assertive “Not now”. However, there are only a few reasons for the investor to refuse directly, as he would like to keep all options open. This way, the founding team is left in uncertainty. Therefore: Ask directly for a follow-up meeting if you are interested in the investor and can imagine another conversation.

2. What does the due diligence or investment process look like – and how long does it take?

If the investor is interested in subsequent steps you should ask for the entire investment process. The process will be very different depending on the type of investor.

  • Let us start with an individual business angel. Most likely, the process will comprise 2-3 meetings and there will be some callbacks concerning further details. So depending on the level of investment and the review process stage, the procedure is rather simple. It is also OK to ask the investor at the end of the second meeting for a more concrete statement about an investment. •
  • Some business angels like to cooperate with others and form so-called angel groups. As a rule, this prolongs the process as more investors (=people) are involved. And this means more pitchings and more coordination between the participants. Ask how long the process will take and what is the overall investment volume. If required, also adopt a proactive stance and try to coordinate the process – once again the investors will appreciate the impression that the whole thing is important to you. And it is a signal of how a future cooperation would look like if an investment was made. However, there are also instances where business angels and their partners follow a clear investment process which is more time-consuming and involves several meetings and due diligence phases. Business angels with formal structures often organize the different tasks among each other when reviewing deals and then discuss the results in the investment committee. This means that you will also meet the other business angels a couple of times and – if everything goes well – will be able to present your start-up to the entire investment committee. Here a decision is made about the next round.
  • The process is somewhat different with micro VC and VC companies because in this case, it is companies and not individuals who invest into a start-up (we discussed the main peculiarities of venture capital companies in this article). In general, 3 to 4 meetings are held to reach a positive decision. The participating companies regularly meet to evaluate the deal flow of different projects. If you learn that your project is discussed this week in the partner meeting, this should generally be seen as positive. But you should also be prepared for a quick “No” after the meeting. As usual, it pays off to have a sufficient amount of alternative investors on your list. If the VC displays a serious interest, you should meet more and more partners in the company in the course of the process. In the case of major reviews, you will finally be invited to make a presentation at a partner meeting. This is the meeting which may be concluded with the decisive “Yes”.

3. How large is a potential investment?

The potential investment is one of the most important issues. You want to know at an early stage which amount is to be expected basically. Knowing the potential investment sum helps to assess the duration of the review process and to estimate which provisions are to be made for the pitchings and which time expenditure is to be planned. If for example one million Euros are needed you cannot spend much time with investors wanting to spend 100,000 Euros.

However, it is a good strategy to begin with a financing round for smaller investments in the first place and then concentrate as soon as possible – after the start-up has generated further traction or sales – on investors who can place higher investments.

Often investors will mention a rough investment range. For example, a business angel announces that he can invest between 25,000 and 250,000 Euros. Or a venture capital fund declares to be able to invest between 500,000 and 5,000,000 Euros. Such ranges are generally not very meaningful. There is a lack of clarity about the actual sums being talked about. Possibly there is a hidden message or a complex process behind this. For example, what a business angel claiming to be able to invest between 25,000 and 250,000 Euros could actually mean is that he can only bring in 25,000 Euros himself and intends to syndicate the rest, i.e. cover it with the help of co-investors.

If a venture capital company mentions such a range, the situation could be quite similar. This could mean for example that no seed rounds are usually made. Maybe you find out that this VC actually once placed an investment ticket of 500,000 Euros which went to a serial founder, however, the VC already knew personally – while the actual minimum investment of the VC is 2,000,000 Euros. If you only want to collect 1,000,000 Euros the VC’s investment range indication of “500,000 to 5,000,000 Euros” would make you overlook the fact that this VC is currently not the right investor for your start-up. Therefore: Do not fail to ask at an early stage whether the capital sum you are looking for can actually be placed.

4. How many investments are you planning this year?

Should you miss out on specifically asking whether investments are planned you might end up in a time-consuming meeting marathon with investors who just want to keep in with you and your start-up for a much later time of investment.

Founders are often surprised to find out that there are investors who do not want to invest at all for the moment. And it might be more surprising that they hold current meetings nevertheless to learn more about your company. In the case of a business angel, this could mean that he is not solvent currently, i.e. has no money at hand. In the case of a venture capital company, it is quite possible that the fund originally planned five investments this year and has already placed them.

The number of investments per year is called pacing and disciplined investors keep a very close watch to ensure continuous investments over the year. For example: If a VC has a seed program and ten deals to be financed per year, but all ten deals have already been financed, there will be no further participation in this year. With such information, the chances of getting financed by this company tend towards zero.  Should you miss out on specifically asking whether investments are planned you might end up in a time-consuming meeting marathon with investors who want to keep in with you and your start-up for much later time of investment.

Another even more subtle problem with VCs is the budget. Some partners currently just do not have a funding framework for further investments. However, it is not uncommon for them to meet with founders even under these circumstances. They want to secure investments beforehand to save time. This is perfectly legitimate – but try to find out about such things and then decide for yourself how to proceed further.

5. Who is involved in the decision?

Some business angels tell you that they are investing together with friends. This can be either good news or bad news. The good thing is that more capital is available if you are successful. The bad things is that decisions have to be taken by several people. Make sure you meet everyone involved in a decision – and openly ask exactly for this. Always appear personally at a meeting and do not choose to be represented by others. After all, this is simply a question of appreciation.

In the case of venture capital companies, it is once again important to understand the decision-making process. In most VC companies individual employees cannot make a decision without consulting a partner beforehand. So the questions to ask are: Which partners take the decision? Can you meet them? Also in the case of business angels cooperating with each other, it is important to meet all decision makers.

This was part 1 of our series of articles “11 questions founders should ask potential investors”. Are there any specific questions you would personally like to ask investors? Write them in your comments. Next week part 2 will be published with another six helpful questions to potential investors.

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