There is a common misconception that startups seeking funding have to answer all of the questions posed during a fundraising round, but nothing could be further from the truth. Accepting an investment is an important decision for early stage startups, and it can have a huge impact over the long haul. For this reason, the folks who will be involved in soliciting investments must be prepared to ask prospective investors a series of revealing questions to better understand exactly what they will be getting from the deal. Here are five key questions to ask:
1. Who else have you funded?
People may be hesitant to ask this question, fearing it may seem overly intrusive and inappropriate. However, companies have a right to know what kind of portfolio an investor has, as well as the general returns with respect to those investments. In many cases, an investment firm with a strong portfolio has contributed to the success of the companies in which it invested. In addition, the types of companies contained within the portfolio will reveal whether or to what extent the investment firm has experience or expertise in a certain industry. Obviously, it may not be wise to accept money from a firm that focuses on life sciences companies if your startup is geared toward oil and gas, and your company won't know this if it doesn't ask.
2. Why are you interested in us?
This may seem counterintuitive because startups are eager to tout the reasons that investors should find them attractive. But, if an investment firm has taken the time to schedule a meeting, there is a pretty good chance that it has already done its research. Thus, discussing why the relationship seems like a good fit should be a two way conversation. You want to figure out the reason for their interest, the level of interest, and how the firm views the arrangement as mutually beneficial.
3. What are your deal breakers?
Knowing why a firm wants to invest in you is just as important as knowing why a firm would be unwilling to invest in you, if not more so. The initial discussions will concentrate on what it is both sides have to offer, but it also provides an opportunity to determine if there are already potential deal breakers at play. In some cases, figuring the roadblocks out early on will allow a startup to make any necessary corrections, if willing and able. And in other situations, it may signal the need to pull the plug early to avoid wasting any more time and resources.
4. Why should we be interested in you?
This question kind of goes along with the portfolio question, but it should be more focused on what exactly the firm can and will do to help your company grow and succeed. Some firms devote substantial resources, such as consulting services, budgeting tips, and technology guidance, that will facilitate a company's ability to streamline, improve its efficiency, and most importantly, boost profitability. However, there are also plenty of investors who simply write a check, wish you luck, and hope for the best. Depending on your company's culture, either scenario may be preferable, so it is important to know what you want and what an investor is even offering.
5. What is your process and how long does it take?
In business, timing is everything. You may have a very specific timeline on which you want to operate, but there is a really good chance that investors cannot adjust their own processes to align with it. Granted, if the situation is right, things may be done to expedite the process, but every firm will have its own internal policies to which it must adhere. It doesn't matter how well the visions align if the investment process does not accord with any predetermined deadlines, so finding out whether both sides can work within the particular timeframe must be done from the get-go.