By Jack Perkins, founder at CFO Hub, which provides on-demand CFO, controller, accounting and HR services.
Whenever entrepreneurs prepare to run the fundraising gauntlet—caught up in the swirling chaos, nervous excitement and mounting pressure—it’s easy to forget that a pitch meeting is a two-way interview.
Although you may be tempted to leap at your first offer, you must remember that capital isn’t freely given. There are costs involved. You cede some equity and control in return for seed money. Therefore, you must be judicious about who you decide to cast your lot with.
Of course, a potential investor will ask probing questions to determine whether you’re a strategic fit for their fund. But to land the ideal partner, you must return the favor in kind.
The questions you ask could be just as revealing as those you answer. To that end, here are five questions you should ask before you break out the term sheets.
1. What is the size of your fund and how much do you typically invest?
Different types of investors will have varying levels of resources and investment preferences. An angel investor may prefer to write checks in the hundreds of thousands, whereas a private equity or venture capital firm may operate in the tens of millions range.
The archetypal investor profile depends on your specific needs.
So, your first task is to determine whether there is a financial alignment between the two parties’ interests. Although your initial research should provide a ballpark estimate of their typical investment behavior, asking these questions confirms that:
• The investor has access to the capital necessary to fund your venture.
• The investor could potentially make follow-on investments down the road.
• The investment is significant enough to be worth their continued interest and involvement but not so much that they overwhelm.
2. What percentage of meetings lead to term sheets and, from there, checks?
Fundraising can be an exhausting, time-consuming process. A DocSend study discovered that, on average, a typical seed round takes 12.5 weeks for a $1.3 million raise.
Chances are, you’ll have to make several pitches before you find an interested and aligned investor. Therefore, managing expectations is necessary to weather the trials and tribulations of a capital raise.
Asking this initial question helps you gauge the likelihood that the initial meeting will actually go somewhere or whether it’s a fool’s errand. The follow-up gives you a sense of how serious a term sheet offer is. Also, a low percentage may be a warning sign, indicating that the investor is difficult to work with or has unrealistic demands.
3. Do you have a specific industry focus for your investment?
Let’s say you’re a medical device company. Would it make sense to pitch to a private equity firm whose portfolio is predominantly composed of renewable energy investments?
Probably not. And even if there was a mutual interest, better options are likely still available.
An investor shouldn’t just be thought of as a check; the best partner will provide additional value beyond money. They may offer industry connections and strategic insights or even provide hands-on support and guidance as you scale. Also, if they’re willing to invest but won’t cover the entire raise, they may be able to connect you with other interested investors who could bridge the funding gap.
4. Could you connect me with someone in your portfolio who failed?
It’s easy for two parties to get along when everything is going according to plan, but what happens when things fall apart? With money and egos on the line, how do both parties react?
As Samuel Smiles once wrote, “We learn wisdom from failure much more than from success.”
If a firm accepts this proposition, it demonstrates transparency, a willingness to admit fault and confidence in its past behavior. Should they connect you with an entrepreneur, be sure to take advantage of the opportunity by asking revealing questions like:
• How did the investor behave throughout the process?
• Did they provide ample support?
• Were they encouraging?
• Did you feel like you had a teammate or an antagonist?
• What would you have done differently?
• Would you have partnered with them knowing what you know now?
You don’t need to take their account as gospel truth—time, tragedy and bias can distort memory, after all. But engaging in open conversation can at least give you a sense of the investor’s character when plans derail.
5. What are your primary concerns about our company or product?
During a pitch meeting, it can be hard to suss out a potential investor’s genuine interest. You might walk out of the room feeling as if you’ve secured their commitment, only to receive a soft no later.
Instead of waiting for the “we like what you’re doing, but…” conversation, get ahead of objections or criticism. Confront them from the outset. Doing so demonstrates your confidence and willingness to engage in challenges.
They may have qualms that you could easily squash. But left unaddressed, those concerns could be the factor that tips the scales—and not in your favor.
Ace your pitch meetings.
A pitch meeting is more than an opportunity to obtain much-needed funds—it’s your chance to land a long-term strategic partner.
If you want to ace the meeting, be confident and prepared to ask questions. Remember that you also provide something of immense value. The right partner could maximize that value. But the wrong one could create more trouble than they’re worth.
With so much at risk, you must vet them as carefully as they vet you. And asking questions such as those discussed above is how you can accomplish that.