Questions You Should Ask Potential Investors
What is the fund's investment thesis?
When investors raise a fund from limited partners (LP's), they do so on what is called an investment thesis. An investment thesis is a guiding principle that a venture capital fund that outlines the fund's investment strategy, focus areas, focus stage, and criteria for selecting investments. It serves as a roadmap for the fund's investment decisions and helps the LPs understand the fund's approach, target industries or sectors, investment size, and expected returns.
Understanding an investor's focus and investment strategy is crucial for aligning your startup with the right partners. By asking about their investment thesis, you can determine if your company fits into their portfolio and if they have experience in your industry. This knowledge will help you identify investors who share your vision and can provide valuable insights into your market.
Often times, investors and funds will have their investment thesis listed on their website's homepage, so it can be important to check there to familiarize yourself with the fund, ahead of a first meeting.
What’s your fund's usual process & timeline when investing in a company?
Knowing the investor's decision-making process and timeline is essential for planning your fundraising efforts effectively. Different investors may have varying processes, from initial meetings to due diligence and closing the investment.
By understanding their timeline, you can better manage your expectations and ensure that you allocate sufficient time and resources to secure the investment. As well as avoid wasting time on an overly complicated due diligence process that may not mesh with the stage of your company. I.E. an unsophisticated investor doing Series A level due diligence on a pre-seed company still building out the MVP.
What key milestones does your fund typically look for in a company?
Investors often have specific expectations for a startup's performance, and knowing these milestones can help you set realistic goals and demonstrate progress to potential investors. By understanding what they look for, you can tailor your pitch to highlight your startup's achievements and potential in the areas most important to them.
The following is an easy framework for "Preferred Company Traction" in order to determine which stage your company is at, and aligning that with what stage the fund likes to invest in a company:
- Minimum Viable Product (MVP)
- Figured Out Unit Economics
- Early Stage Growth
- Late Stage Growth
- Public Markets
Does the fund focus more on the team's founder-market fit or more on traction metrics such as revenue, number of users, defined CAC to LTV ratio, etc?
Different investors prioritize different factors when evaluating startups. Some may emphasize the founding team's expertise and founder-market fit, while others may focus on traction metrics like revenue or customer acquisition costs. Knowing their priorities will help you tailor your pitch to better align with their criteria and increase your chances of securing an investment.
You will want to avoid investors whose pattern matching doesn't align well with the reality of the market. I.E. an unsophisticated investor who wants to see $100k in revenue but expects the company valuation to be below $1m. This often happens with investors or angels who have background in real estate or private equity. Or are geographically located outside common technology hubs like California, New York City, Boulder, Austin, London, Etc.
Once invested in a company, how does the fund work to support portfolio companies?
Understanding what resources and support an investor can provide after the investment is crucial for choosing investors vwho will be valuable partners in your startup's growth. Some investors may offer mentorship, introductions to potential customers or partners, or assistance with hiring. By knowing what they bring to the table, you can select investors who can help your company grow beyond just providing capital.
In recent years, VC's have been creating a "platform strategy" for supporting thier portfolio companies. A VC platform strategy refers to the approach taken by an investment firm to provide a comprehensive suite of value-added services to their portfolio companies. These services can include business development, talent management, networking, events, operations, community building, and content, marketing, and communication support. The aim is to differentiate the VC firm from competitors and enhance the success of their investments. While large VC firms like Andreessen Horowitz may offer extensive platform services, smaller firms may face budgetary and expertise constraints that limit their ability to create a truly distinctive platform.
Understadning a fund's platform strategy could help you decide which investor you would like to have on your cap table as investors in your company and which you do not.
What is the size of your current fund?
The size of an investor's fund can impact their capacity to support startups financially. Knowing their fund size can help you gauge the level of investment you can expect and whether they have the resources to participate in future funding rounds. This information can help you determine if a potential investor's financial commitment aligns with your fundraising needs.
What is the normal range for your check size for your fund?
Understanding the typical investment amounts from potential investors is important for determining if their financial commitment aligns with your fundraising needs. By knowing the range of their check sizes, you can evaluate whether the investor is capable of providing the capital your startup requires to achieve its goals.
If an investors check size is larger then your entire round (I.E. they are a later stage investor), be sure to still nurture the relationship and stay in touch. As they could likely be a future investor in another round your company does down the road.
Asking the right questions when talking to potential investors is essential for finding the best fit for your startup. And it makes you look like a knowledgable founder. Use these seven questions as a starting point to help you identify investors who share your vision, have experience in your industry, and can provide valuable support for your company's growth. Remember, finding the right investor is a crucial step in the fundraising process, and asking these questions can help you make informed decisions about who to partner with.
At Finta, we are committed to improving how founders find, connect with, and secure the resources they need to bring their ideas to life. By leveraging our cutting-edge technology and AI-powered fundraising copilot, we aim to make the fundraising process more efficient and accessible to all. As you embark on your fundraising journey, we hope the knowledge shared in this article will help you find the right investors and successfully navigate the complex world of venture capital.