Founders are often so focused on making their business attractive to investors that they neglect to consider whether the investors are also attractive to them. It is important to remember that investment in a start-up is a two-way street and getting an investor on board is a long-term partnership. This is why the key to success lies in finding the right investor who will share your vision for the business and to achieve this you need to ask the right questions.
We have listed below what we consider to be the five crucial questions that you should ask yourself and any investor before deciding to move forward with them. Investor due diligence is fundamental to giving your investment round and your business the best chance of success and this will be the same for first-time fundraisers and experienced fundraisers alike.
The five key questions
1. Has your investor invested in your space and your stage before?
Typically investors will focus their financing on certain industries and at certain funding stages. The experience of an investor in these particular areas can be priceless particularly for specialised markets. Early-stage investors can often offer insights to help companies accelerate their journey to achieve product-market fit.
An investor’s experience and reputation in your space can make a huge difference. It is worth doing some research into the investor’s background and past investments to find out more about their approach and how they operate. You can also gain valuable information by talking to other founders or investors who work with them or have worked with them in the past.
2. What is your investor’s investment criteria?
Founders need to know what an investor’s investment criteria looks like. Different types of investor will focus their decisions on different metrics and measures. Early-stage angel investors may finance smaller amounts based on the shared belief in the business or the entrepreneur themselves. Venture capital funds on the other hand may invest larger amounts at later stages and base their investment on more tangible metrics such as the business model and KPIs.
It should also be considered whether the investor will co-invest or whether a lead investor will be needed to set valuation. It is worth bearing in mind that a lead investor can draw in more funding.
3. How does your investor help portfolio companies?
Investors aren’t obliged to offer anything more than funding but ideally they would also offer a commitment to the success of your business in other ways. It is advisable to seek out those investors who can offer something extra such as access to networks, mentorship and support. It is also sensible to look into whether they have supported portfolio companies in the past and particularly how they have stood by the businesses during challenging times.
4. Does your investor invest at the next round?
This is important to find out as securing funding in subsequent rounds is key for the advancement of startups as they achieve milestones. Consider whether the investor can offer this longer-term commitment to your business. Partnering with investors capable of participating in future rounds not only enhances the stability of your business but also heightens its appeal to other potential investors as it provides reassurance that your business can achieve its funding goals going forward.
5. What’s your/your investor’s preferred exit strategy?
Exit strategy is one of the most important questions as this sets the tone for your entire journey with the investor. You need to understand each other’s preferences regarding your company's exit and timing. Their plans for an exit must be compatible with yours and this will ensure that the growth strategy for the business is aligned. This question may also arise during your pitch presentation so it’s useful to have a think about this beforehand.
I’ve had my first meeting with the investor. Now what?
After your first meeting with an investor, you should hopefully have the answers to these five key questions. Whether you are a founder raising funds for the first time or a funding veteran, the answers to these questions will allow you to assess if the investor is a good fit for your business and whether they could be a partner who could support your vision.
In terms of practical next steps, once you have found a potential investor, they will want access to information about your business to perform their due diligence and to check your business meets their investment criteria. Safeguarding your business assets including confidential information and intellectual property is crucial.
This can be achieved through various legal routes including non-disclosure agreements, employment contracts and consultancy agreements. We have a team of corporate law experts who can help you to navigate through these processes and answer any questions you may have. Fill out the short enquiry form below and a member of our team will be in contact.
In the meantime, find out how to attract investors to your start-up business via a tax-efficient investment scheme in our article.
