Understand what each investor brings to the table before you bring them on board.
When meeting an investor for the first time, entrepreneurs face a lot of pressure to make a favorable impression quickly. In many cases, this tends to make people talk too much in an attempt to appear confident, knowledgeable and articulate.
It also makes them forget to ask questions and qualify the investor’s interest and fit.
No one likes hearing a firm "no," but a rejection is better than leaving a meeting uncertain of where you stand or whether you should dedicate further time into pursuing investment discussions with that person.
Here are five key questions that should be included in every entrepreneur’s talk track to help gain the clarity you need:
1. What is your investment history in my sector?
While online research may help you paint this picture, sometimes an investor’s domain expertise or focus is not easily discernable, especially in the case of angel investors. Investors regularly shift investment strategies, which is why having this dialog is important. Furthermore, investors need to stay updated on market trends and collect intelligence to help them refine their investment theses. If they have not yet made an investment in your sector, it could be a sign that they are in fact-finding mode and may be more interested in getting smart about a particular industry than in taking a position to make a near-term investment.
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2. Do you prefer leading or following deals?
Another elusive trait to identify is an investor’s proclivity to lead a deal or be a follower. This is crucial in terms of how you should prioritize your investment discussions as you want to front-load your fundraising process with investors who lead deals, as they will take charge of due diligence and negotiate a term sheet. While angel investors tend to be followers because they write smaller checks, there are those that savor the position of being "first money in."
Likewise, most seed-stage venture capital (VC) are usually followers. They may be reluctant to readily admit this, though, because they don’t want to miss out on building relationships with promising companies. Hence, it’s up to the entrepreneur to distill this information.
3. What is your investment capacity right now?
Investors have finite capital, so the point in which you catch them in their investment cycle will dictate how seriously they can consider an investment. In the case of angel investors, many of them rely on portfolio liquidity to recycle their capital for new investments.
Funds tend to raise new pools of capital every three to five years. If you are in discussions with a fund that is at the tail end of their current fund’s cycle, they may not have capital available to make new investments, or may take more time to make a decision.
It’s fair to ask a fund manager how big their fund is, how much capital they have deployed thus far and how many new investments they are looking to do before the fund is fully committed.
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4. What is your decision-making process and timeline?
Investors have different methods they use to evaluate new investments, which impact how much time they need before making a final decision. Generally speaking, since angels are investing their own money and at lower amounts, their turn-around tends to be measured in weeks.
Funds, on the other hand, are usually made up of multiple partners and require majority vote or unanimity for a deal to get approved. Since many investments are led by funds, they need to take time for due diligence, which can include a review of the market, technology, team, financials and other information. This process is measured in months, but without structure and an agreed-upon timeline, can become unwieldy.
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5. What information do you need before making a final decision?
For early-stage companies, investors may place different weights on what they are looking for before getting comfortable. Certain investors may want to spend more time vetting and building the relationship with the founding team, others may be more captivated by traction and understanding the product or business milestones achieved.
At minimum, it is good practice to already have several documents prepared in advance including a deck, a product roadmap, a competitive analysis and a financial forecast. Beyond that, other requests may come in, such as customer discussions or a technical deep-dive, but these are best left until the conversation gets more serious.
If you go into an investor meeting with this check list in mind, chances are, you will become a more efficient fund-raiser and maximize the value of your most precious commodity: time.
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