When I’ve pitched investors in the past, I prepare for the questions they’ll likely ask me, from market opportunity and size to financial metrics and timeline. From my own experiences and having consulted for multiple founders, I’ve learned that it’s just as important to interview your investors as it is for them to be convinced by your pitch.
Choosing a partner goes beyond securing funds; it’s about finding a partner who believes in your vision and can contribute to the growth and success of it. Similar to a marriage, the investor-founder relationship should be built on trust, transparency and shared values. Take the time to make an informed decision, as it will significantly impact your company’s trajectory.
Below are seven questions, alongside specific case studies, that founders should ask investors to help ensure a mutually beneficial partnership.
1. How do you define your role as an investor?
I’ve heard many responses to this, ranging from an investor wanting to be a resource to a decision-maker, which is why it’s crucial to ask this. Elle Lanning, Managing Director at Camino Partners and also a key member in the growth of KIND Snacks (currently valued at about $5B), always asks this question because both the investors and founders will have strong points of view. Lanning explains how “passion can be mistaken as direction,” and she’s persistent about reminding prospect and current investors that “while the Camino Partners team has their own point of views, it is up to the entrepreneurs and day-to-day leaders of a given company to run the business and make the best decisions for them.” The investor role is very diverse, particularly as some investors will see themselves in a governance capacity.
KIND Snacks is a great case study for this question, as the founder, Daniel Lubetzky, bought back the stake owned by private equity firm VMG Partners for $220M in cash and notes. Lanning explains, “VMG was a solid partner for the time we worked together, but we reached a place where our objectives were different. We were fortunate to have run KIND in a healthy and sustainable way, so we had a lot of options when we decided that Daniel and the KIND team were best suited to continue to lead the brand’s growth.” It was a risk, but the result paid off, as the start-up is now valued at about $5 billion.
Related: 5 Questions Every Entrepreneur Should Ask Potential Investors
2. What is your exit strategy?
Having an understanding of the timeline expectation and eventual exit strategy for the investor will help you determine if your future plans are mutually aligned.
Related: When Should Business Owners Start Developing an Exit Plan? Here’s What You Need to Know.
3. Can you provide references from other companies you have invested in?
In line with the saying, “If you don’t know the horse, you check the track record,” it’s crucial to gather insights about the investors’ style, reliability and how they work with partner companies. By speaking with other founders to get references about investors, you’ll get a candid opinion of the personalities, best skills and added value that the investors may be able to provide. Again, aligning values and personalities will set you up for the best partnerships.
4. What value are you able to bring beyond capital?
Alongside funding, investors can offer valuable advice, connections and industry expertise. Have they invested in similar companies before? At times, great advice or case studies can support your company even more than their investment. Understanding the additional support and value an investor can provide is paramount.
Related: Investors Are Overlooking the Gig Economy. Here’s How to Unlock Its Untapped Value.
5. What are your expectations for growth and performance?
The response to this question will help you assess if the investor has realistic expectations and if the expectations align with your plans. Adam Harris, Founder and CEO of Cloudbeds, a company founded in 2012 that raised about $250M, prioritizes clarity in outcome alignment. Harris explains, “You need to know if your investors are underwriting your deal to require a 2x, 3x, 4x, or 10x return (or whatever the number is). This answer will dictate the amount of risk they’re willing to pursue and the type of capital investments that follow. Know when enough is good enough for the outcomes you are seeking (future fundraises, liquidity events, etc.).”
Most investors don’t share their thoughts about underwriting a business, but knowing their outcome requirements will align you with investors at every growth stage.
Harris suggests that all questions to investors center around the following:
- How do you incentivize and keep incentivizing me to build what we both want?
- How do you and I stay aligned with risk appetite, enterprise value extraction and what’s right for the business?
- How do you underwrite my deal?
If you can get full transparency on responses for the above, you’ll have a better shot at alignment, allowing you to move faster to focus on the big objectives.
Related: How PR Can Attract Investors and Add Value to Your Startup
6. How often do you expect to meet after funding?
Some investors are going to be far more high-maintenance than others, and communication styles can make or break a partnership. You do want a decent amount of interaction. Investors can help find clarity with high-level decisions, but I suggest they stay out of the details, as this may weigh and slow you down.
7. We have a challenge with this issue. Do you have any insight into how we may help solve it?
The response to this can be very telling because it will shed some light on how the investor thinks, works and the type of value they can offer. It also demonstrates to the investor that you are open to their feedback and value their expertise as a potential partner.
Choosing the right investors goes far beyond getting capital. Through open and honest conversations, look to find partners who believe in your vision, feel good compatibility and offer a funding package that will contribute to the growth of your business. Take some time to make the most informed decision possible and ensure clarity across all questions and expectations. If it doesn’t feel like love at first sight, reassess.
Read the full article here
