Are you really ready to begin a fundraising round for your startup? Before going for it there are certain questions that entrepreneurs must ask before seeking funding.
Who doesn’t want more money for their startup? The media even makes it sound simple and like the go-to strategy for launching or scaling a business today. However, there can be a lot more to it than most realize. It can be far harder to reverse the process. Impossible, unless you can afford to buy your investors out at a multiple that works for them.
Raising money could be exactly what you need to make your vision a reality. Here’s how to make sure it’s the right move for you, and that you are ready to hit the investor circuit.
The Ultimate Guide To Pitch Decks
Questions Entrepreneurs Must Ask Before Seeking Funding
1. Do I Really Want Outside Funding?
Funding isn’t free. $50 million man, navy SEAL, and creator of the TRX fitness brand Randy Hetrick warn other entrepreneurs on the DealMakers Podcast to carefully weigh the financial consequences of taking outside money.
It may not only come with interest and giving up a large share of profits but can put a lot of pressure on your startup to deliver specific results on your investors’ timelines. It means taking on a substantial obligation to those investors, in addition to the company itself and any cofounders, employees, and customers you already have.
Some very successful founders on the DealMakers Podcast are fans of taking as much money as you can get. Even if it means taking money early, while it is cheaper. Others are very cautious about only raising just enough, or even not raising until it is a necessity.
2. How Much Am I Willing to Give Up?
This one is definitely one of the most questions that entrepreneurs must ask before seeking funding. Accepting funding means you are trading a piece of your company and its ownership for money.
How much are you willing to give up? How much control are you willing to give up? Because, when you bring in investors and new board members they have a say in how you run the company.
Perhaps an even better question is, what the return will be on any funds raised. Will the money you receive for giving up 25% of your company in this next round ultimately return you far more over the long run than that 25 % of profits would have put in your pocket? What about once you have given up 50%, 75% or more?
3. What Role Will I Take?
What role will you take during the funding process? What role will you take afterward?
Fundraising is a lot of work. In early fundraising rounds, investor pitches can be very demanding. In later rounds, it can be surviving the due diligence which really demands mastery. obviously the questions that entrepreneurs must ask before seeking funding will vary from financing cycle to financing cycle as the business matures.
Who in your company, or among your expert consultants will take the lead on the fundraising process? Is there someone that may do it better than you? Or will multiple people need to be actively involved in this on a daily basis?
Business experience can be a large factor in getting funded. Some of the entrepreneurs I’ve interviewed have turned to hire new CFOs and CEOs early to help position them to attract more capital and harness experts in building a real business.
Or you may have to be prepared to focus all of your time on this side of the venture, and ensure you have an amazing technical and marketing team to handle all of the product-related side of the business.
4. What Should I Look for in an Investor?
You’re not ready to pitch or even create a pitch deck unless you know the type of investor you really want for your startup. Capital is still plentiful right now. Raising money from angels and VCs is far more about what they can do for you besides the money. The money is just a tool that ties you together and gets them invested in your success.
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The more time you take defining the investors you really want for this round, the better. This can change by round too. You’ll likely need a very different set of investors at your Series B than a Seed Series round.
What do you want them to do for you? If it’s to break into a new market, then maybe you want a VC fund based in Asia, not Silicon Valley. If you want to get to mass through a specific retail channel, it may be a corporate investor or accelerator you need.
If this is a venture you deeply care about, then ensuring alignment in mission, vision and business philosophy and ethics is critical. Or you may quickly see your startup turning into exactly the problem you wanted to disrupt and change in the first place.
5. Would I Invest in This Business?
Looking at what you have to offer, present and what’s going on inside, would you put $100k or $100M into this startup as an investment if you had the cash and freedom to invest in anything?
The key when thinking about the questions that entrepreneurs must ask before seeking funding is to look outside the box and see if they would invest if it was someone else running the show.
If not, what can you do to bring it up to par? Does accounting need to be improved? Are there distribution and manufacturing logistics to be improved?
6. Do I Know What Investors are Expecting at this Fundraising Stage?
There are some business basics that should be obvious any investor will look for. However, what investors expect and demand before considering writing a check can change at every round too.
You might get away with being super passionate and a great salesperson when it comes to pre-seed friends and family or even small angel rounds.
Later on, you will have to prove momentum, revenues, and more. If you don’t know, then you can serve it up to them.
7. Do I Have Time to Invest in Fundraising?
Even the most successful startup fundraisers report that this can take up half of their time during early rounds. It may take 200 no’s to get a check.
In later rounds, the due diligence part can demand daily and weekly phone calls and meetings. That’s all on top of everything else you need to do for the business, and to meet your obligations to any earlier investors.
Do you have the time? If so, is it going to provide the best ROI on your time? How will that compare to just getting to work making sales and then letting investors seek you out?
8. What is the One Metric You’ll Raise On?
Even if you have a two-sided marketplace startup that solves multiple problems, it is far easier to excel and impress investors if you can focus on one data set or metric. Keep it simple for them. Show them that you can consistently growth that metric between every milestone. What’s yours?
9. Am I Prepared to Answer Investor Questions?
A slick pitch deck and tight verbal pitch is great. Being ready to answer all the questions investors will throw at you and test you with can be a completely different ball game. Anyone can wow with a quick sales presentation. Those that stand out are those who can back it up. Make sure you are ready for these 100 common questions investors will ask you.
Storytelling is everything which is something that you will need to be able to master to have most of those questions or concerns addressed upfront. Being able to capture the essence of what you are doing in 15 to 20 slides is the key. For a winning deck, take a look at the pitch deck template created by Silicon Valley legend, Peter Thiel (see it here) where the most critical slides are highlighted. Moreover, I also provided a commentary on a pitch deck from an Uber competitor that has raised over $400M (see it here).
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
10. Have I Researched Winning Pitch Deck Formulas?
Of course, you may never get the chance to field those questions if your pitch deck is a flop. Make sure you know what investors really expect in a deck, and what they spend most of their time looking at. Check out exactly what to include in your pitch deck in this Forbes report.
You may find interesting the video below where I cover in detail the questions entrepreneurs should ask investors.
FULL TRANSCRIPTION OF THE VIDEO:
Hello, everyone. This is Alejandro Cremades, and today we’re going to be talking about the questions that entrepreneurs should ask investors. The fundraising journey is tough. It’s going to be full of obstacles, full of those hurdles in order to get to the money, to get that money wired into your bank account.
The investor is going to ask you questions during those tough meetings, but you also should be in a position to ask questions, not only because it’s going to say a lot about you and the research and the homework that you’ve done ahead of that meeting, but then also because it’s going to give you a better understanding as to how you can approach the fundraising journey better and how you can optimize, as well, for time so that you can get that money more quickly. With that being said, let’s get into it.
What percentage of your meetings lead to term sheets? This is a very good question because, essentially, what you’re going to understand, or you’re going to get better access into the funnel of that venture capital or that angel investor or whichever investor type of profile that you’re dealing with. That way, you know what are your possibilities leading from that meeting into a potential check? Again, it is a good way to get great insights into how they’re thinking about making investments and into what their process actually looks like.
Next is, what percentage of term sheets actually lead to checks? Here, what you want to know is, once they’ve already given that promise to make an investment in a business, the last thing that you want is that the term sheet gets pulled or whatever happens that they’re not giving you the money, and you don’t get that check, and you don’t get the money into your bank account.
If that’s a high number, you want to understand or ask them, “Why is that the case?” That would help you understand if it’s good for you to continue investing time with them, or to perhaps shift gears and go and spend time with somebody else, where you can have better access or better visibility to really reach that money.
How often are we going to be meeting after the investment? This is a great question because it’s going to give you an understanding of the level of expectations that they have in terms of meetings. That could come in the form of informal meetings or board meetings.
But you don’t want to get involved with someone that is going to be labor-intensive because your duty is not to be reporting to the investors 24/7, but more than that to execute on your business so that you can deliver results and returns to those investors that are investing in your business.
How often do you lead rounds? This is a great question because, especially at the beginning, you want to separate the ones that lead from the ones that are just followers because, in many cases, investors are like sheep; they go where everyone else is going.
You want to really shoot and optimize for the ones that are leading that are not going to care about what everyone else has to say or do. If they like what you’re doing, then they’re coming in, and they’re going to make an investment and price your deal or your opportunity so that everyone else comes in and also invests under those same terms.
It’s always about optimizing for time, and you’re going to get the best return on your time when you’re going for people that are going to be in a position to give you that money right away without wondering what everyone else is doing.
How many follow-on or follow-up investments have you made? I think that this is great in terms of a question for two different reasons. On one end, you’re going to gain better visibility as to how involved and engaged they are with companies after they have made an investment. So, that’s going to give you an understanding of, and maybe you can expect another investment from them or maybe not.
The other thing is that if you get an investment specifically from a venture capital firm, and they’re not reinvesting, that ultimately is sending a negative signal to the market because other investors are going to think, “Hold on. They have a venture capital firm. They’re not investing. There has to be something wrong with the business.” So, that’s something that could be catastrophic for you, and that’s why you want to make sure that you have people that are coming in, that are aligned with your vision, with your mission, and that they would reinvest if things are executed the way that it should.
What could we improve on the pitch? This is a great question because, at the end of the day, those investors want to invest in entrepreneurs that listen. They are investing in you, and then they’re investing because they want to help you in building your business.
So, by your asking them this question, that comes to show that you listen, that you want to improve, and that you want to do better. That’s going to get a great impression from them about you. Again, remember. Those are people that are meeting with your competitors, and also, they’ve made a decision, and they’ve surveyed and researched your market.
So they’re going to give you great insights as to how you can repackage or reposition certain things about your pitch to make it even more exciting. So that’s a good question that can come in two shapes or forms of positive stuff that you can get in terms of an answer.
What’s your timeline? You want to ask this question because it’s going to give you an understanding as to what to expect in terms of when they may make that investment. You’re not going to be waiting forever. You need that money now, and for that reason, you want to understand whether they have the money to deploy now, and if they have the money to deploy now, how long does it actually take them to deploy such money?
The last thing that you want is to optimize or invest time with people that don’t have the money or people that take a long time because of whatever bureaucracy that they have in terms of their process. So be very careful with those timelines.
Who would you put on our board? That’s a really interesting question because it’s not about the firm that’s investing in your company, it’s about the partner that is going to be representing that company in terms of their portfolio companies that have received an investment from them. That’s essentially a venture capital firm.
Obviously, if it’s another investor that is an individual, then you want to make sure that they are people that you get along with and people that can bring something to the table either because they understand the space, the segment, maybe they’ve done it in the past.
So you want actively-involved investors that can bring their networks to help in pushing things to the next level because at a board level, you’re going to be discussing strategy, you’re going to be discussing problems and potential solutions. So you want people that have been there and have done that before.
What do you expect from this investment to do for your portfolio? This is another good one because you want to understand what the expectations, what kind of multiples they’re looking for in terms of a potential exit, and you also want to understand if that’s going to align with the way that you’re seeing things because the last thing that you want here is to have someone that puts a tremendous amount of pressure in your business, a tremendous amount of pressure on the execution, and you cannot afford to have that.
What’s the first thing you would want us to do after closing? This is a question that is going to lead you to understand what exactly will be the potential next steps. Here, what you don’t want is to keep them waiting. Once you get the understanding and the answer, then make sure that you have that already in place to give it to them.
Here, once you have received the term sheet, which is the promise to make an investment in your company you are going to go through the due diligence process, which is essentially very fine, each and every single claims that you’ve made about your business, whether that is having interviews with you and your team, interviewing some of your customers or perhaps partners. That’s going to take time.
You need to understand what that process is going to look like for them; what are going to be those expectations? Then, also, for you to prepare toward that due diligence process.
Who else needs to approve this investment? Especially when you’re dealing with corporate investors like the corporate venture arm of a larger corporation, they’re going to have all types of committees that are internally established to approve or reject certain investments that are going to be considered.
You need to understand who the parties will be who are going to be involved in order to get your investment to go forward, and that way, you’re going to know certain things where you can help that investor that is sponsoring your deal. This could be asked to venture capital firms and also to private equity firms. Obviously, for angel investors and individuals, it doesn’t matter because it’s just going to be them.
How much do you typically invest? This is an interesting question because it’s going to help you understand if that investor comes in, what’s going to be that potential amount, and if you may require other people to also invest to fill the rest of the round. It gives you like a lay on the land as to what could be that round and who would be needed in order to get it to a close.
How much do you reserve for follow-on rounds? Here, you need to understand what’s that typical amount of money, how much would they potentially invest in your business down the line, and even perhaps how much have they already invested of their current fund so that you’re not wasting your time with people that don’t have dry powder to invest in your business?
Would you mind introducing me to a founder of a portfolio company in your venture fund or even you as an investor individual that has failed? You want this investor to introduce you to an entrepreneur that they have invested in that has failed. Talk to that entrepreneur because when you’re discussing with that entrepreneur, you’re going to see how they behaved during the tough times.
During the good time, everything is great; everyone loves each other, but during the tough times, when you’re on the other side of the mountain, you’re going to understand whether they rolled up their sleeves, whether they treated as a write-off and they left them to die.
You want to know if, during the tough times, they went at it with the entrepreneurs to be helpful and to do whatever it took to turn things around. Otherwise, if they leave you like a write-off, then no one else is going to be investing in you, and it is going to be a complete mess. So you want to know that people are ready to jump behind the trenches with you to push things forward.
Let me know on the comment section below what else you typically ask investors when you’re meeting with them. Also, make sure that you like the video and subscribe to the channel so that you don’t miss out on all the videos that we’re rolling out every week.
And take a look at the fundraising training, which is the program where we help from A to Z with everything related to fundraising. There you’ll find live Q&As, templates, agreements, a community of founders helping each other all over the world, and I think that you will find tremendous value in it. Thank you so much for watching.