What questions will an investor ask? What does an investor expect from you for professional funding? It is important to understand what kind of questions to expect when you’re dealing with professional funding. The first five things are
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You and your team
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Product/service solution
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Market
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Market access
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Traction
These are the five things that an investor looks for right off the bat; you and the team, the product, the market, the market access, and do you have traction, can you prove that people will pay for the product? All of that is what they look at seed and pre-seed money if you are going after professional funding, otherwise, you’re bootstrapping in this round.
Consequently, after that, you start growing. What questions will an investor ask? Some of the other things investors are looking for are:
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Adaptability
Are you adaptable? One of the statements is that the plan never withstands contact with the customer. Things just keep changing at the rapid pace of acceleration and innovation today. How adaptable are you as the leadership team in a business?
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Growth Potential
What’s the growth potential of your company? Now we’re not looking at the beachhead market, but we’re looking at follow-on markets, market penetration, and expansion.
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Use of Funds
One of the biggest questions is: How are you going to use my money? You don’t use professional investors’ funding to pay off your debt. They’re not going to give you any money to pay off the money you’ve already spent. Don’t even go ask for it.
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Key Partners
Who are your key partners that will make a big difference? Who have you partnered up with?
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Exit Strategy
What’s your exit strategy? That will be the first question an investor will ask you—what’s your exit strategy?
If you say, well, we’re thinking about exiting in four or five years, they know right off the bat, you don’t know what you’re talking about because four years is a 7x exit. Five years is a 10x exit. That’s 300% difference. You got to know which one; you got to know who’s going to buy you for what amount and how you’re going to achieve that valuation. You need to know all those things if you’re going to deal with a professional investor.
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Risk Management
How are you going to manage the risks and do you know what the risks are? What are the milestones? When they give you money, there are milestones. You have 18 to 24-month milestones, and you got to meet those milestones to get your next level of funding because you’re in a race, remember.
They want to walk right up through the seed round series, A, B, C rounds, and walk with you all the way to selling the company off down the road when you exit. Milestones become very important. You may not be as pressured when you deal with angels, but once you get into the venture capital round, it’s a different game, they are going to change your management.
As you scale that organization and put in professionals, you as the founder may end up with 10% 15% of a great big pie, but they’re going to move your management team out because they’re professional at scaling the organization.
Lessons Learned
What questions will an investor ask? Here are some lessons learned on this whole process;
- Not understanding the financial runway requirements.
You need to know how much money you need when you need it, how fast you’re going to burn it.
- Giving too much equity too early
Giving away too much equity too early is a problem.
- Equity to the team without vesting
You need to have people vest to get the equity. The standard vesting period is four years, some are going to five today because it takes three to five years to create a sustainable business. You don’t want your team to leave sooner than that if it takes five years to get to sustainability. Vesting is important.
- When is the best time to get funding?
When is the best time to get funding? It is when you don’t need it because once you need it, you’re over the barrel. Always be looking at the options before you get there.
- Manage the process so the deal isn’t stale
You want to manage the process so that the deal doesn’t go stale. Once you
- Warm leads are critical, but…
once you’re on the radar, everybody knows you exist. Once you start pitching, if you don’t get funded, you better fix why you didn’t get funded real quickly because all the investor groups are a lot of times connected. Warm leads can be great to get in but the deal goes stale, fast.
- And the last thought is always to be honest and have integrity.
If there are skeletons in the closet, they’re going to find them. Be honest and open with your investors.