Startup founders should ask these questions to on-board the right investor
An investor-founder relationship is usually a two-way street, but the way business is conducted usually, it could seem like it isn’t. A lot of prolific business people compare the relationship between the two to dating – you can’t date someone you don’t agree with, and it always takes two people to make it work.
While investors are used to probing founders and asking questions, the other side of the table usually takes on the role of answering those questions, instead of posing their own, which should not be the case, says Amit Somani, Managing Partner at Prime Venture Partners.
Amit Somani, Managing Partner at Prime Venture Partners
“Just as investors test you and your business, you also have the right to test their minds and firms.”
He adds that it’s important for both parties to be sure if the person on the other side of the table is worth taking on board. So, while preparing for an investor pitch is important for founders, taking some thoughtful questions into the discussion room for their potential mentors and advisors is equally important too.
“What kind of, and how much risk are you willing to take?”
Investors are not faceless entities – they are human beings with their unique risk appetites. Despite their startup portfolios or investment volumes, every investor has a type, and they select potential investees on those lines.
Hence, before signing any deal, it is necessary to take some time out to understand the type of investor one is dealing with, says Amit.
“Founders should ask VCs the type of investment risks they are willing to take, and how patient are they on those risks. It could be a business model risk, product risk, cash flow risk, or market risk. Some investors are willing to bet on companies that have fragile business structures, while others may want to see a strong product, backed by solid cash flows," he says.
Some would even want to see more market share, or be apprehensive about playing a field.
All these questions will give the entrepreneur a sneak peek into his or her partnership with a particular investor, says Amit, though cautioning that the motive behind the inquiry should not be to judge an investor, but to understand the comfort zone in which they, or their firm, likes to function in.
“What is your macro view of the sector?”
Founders can derive two view-points by asking this question: the first would be the basis on which the investors judge the industry the startup operates in. That is, does the investor judge the sector based on the existing players in the market, or do they recognise the future potential of the sector?
"A sole focus on the former might increase investor pressure if too many startups join your sector, while a one-sided emphasis on the latter might lead to negligence of the effects of competition. You will want a balance of both. An investor who looks at the right basis points while evaluating the worth of a startup in the market, with a top view of the whole sector,” Amit says.
Second, an in-depth macro insight of the industry will help the startup founder understand the in-and-outs, and its future, better.
An investor with market knowledge is essentially a mentor and a guide. When a founder takes an investor on-board, the former’s motive will typically be long-term – at least five to ten years, which is the amount of time required by any firm to really flourish. To extract the adequate value, knowing the investor’s macro-view is important. Post-investment, the founder will be relieved of the duty of finding an expert advisor who knows the market better than them.
“Does the investor fit in?”
Just as investors and VCs judge startups and founders to test whether they would fit in, founders need to ask themselves the same to evaluate where their investors fit in their company.
“The most successful startups have a mix of investors, where both the founder and the promoter complement each other,” Amit says.
Additionally, the mind-set of the investor and the startup founder needs to be similar as well. Just how a team shares the ambitions of the founder, investors should too, and that means properly understanding each other’s risk appetite, industry viewpoints, and trust in the product.
“Be a founder who wants more than just money from their investors,” concludes Amit.