We’re concerned about how many times startups actually qualify their potential investors so they don’t waste precious time and effort going after those who will never fund them … i.e. barking up the wrong tree? Let’s assume you’re looking for funding and you have done some great networking and have succeeded in getting your first meeting with a potential investor. You pack up your terrifically tuned pitch deck, of course. (If you are not confident about that check out our CEO Coach podcast “Perfect Pitch”)
What else do you need to know? To do to prepare?
Alex Iskold wrote recently about 11 questions YOU should be asking investors in your first meeting. These are questions to qualify potential investors in your funnel, and stick to reality. Alex should know; he’s managing director of Techstars in New York City, and has invested in more than 50 companies. Here are a few that caught our collective eye.
First (and we quote directly): “Are you interested in potentially investing in my company, and if so what are the next steps?” Iskold says NO first meeting should end without you asking this question. This is information you need to know. Why waste your time on someone who doesn’t really want to continue the conversation? Ask and find out where you stand. And if necessary, move on. Listen carefully to the language. A vague statement by an investor is what is known as a ‘soft’ no, and means this one is not interested. Move on. But, if the investor suggests a follow up call or meeting, then you have interest. Green light to proceed.
#2 “What is your investment process, and how long does it take?”
Timing and process varies widely from angel to VC to PE. One key reason you need to get a sense of how long an investor’s process will take is whether you can hold out for this one. Have we not all been party to those nail-biting times waiting for investors to decide, while we scraped the bottom of the operating funds barrel?
#3 “What is your check size?”
Investors will have pretty clearly defined parameters – including minimums. While we can understand how you might be eager (even desperate) to take ANY size check, the right ‘fit’ matters deeply in acquiring investments. If you are raising a million and the investor you are talking to has a minimum of two, there are myriad reasons your company is not right for that investor. Your company is not ready. You want to keep your options open for the next round. And so on.
#4 “How many more investments are you planning to make this year?”
You will save a lot of time if you establish up front whether this investor has capacity or not at this time, or has a full portfolio. Don’t be surprised if you still get a meeting; the investor may simply want to hear about your company, perhaps even to benchmark a competing company under consideration
#5 “Who else needs to be involved to make the decision to invest?”
If you don’t get a meeting with the decision maker – or makers -- well, that’s a ‘soft no’ answer. If a firm is really interested in investing in your company, the right person will be available to you.
You need to find out whether you are talking to someone who can or will fund you, or just having a nice chat. You don’t want to waste precious time barking up the wrong tree. Despite how badly you think you need cash, your time is way more limited and valuable than money is. Elizabeth Yin of 500 start ups recently posted a guide to how seed investors benchmark, and indeed classify start ups. Make sure you are on-topic and on-message when you approach them.
In her blog, ‘Bringing Transparency to Seed Investing’ Yin names four basic categories of startups:
- Super high tech companies, rarer that most entrepreneurs think, especially those who think they have such a start up. Such companies are building technology that is so difficult that “only a small subset of people in the world can build it”. Do you have these on your team? Pedigree counts; most of the teams on such projects will have worked at Alphabet, or won DARPA challenges or have PhDs in related studies. No room for self-taught here. If your start up is indeed a high tech company of this magnitude, by all means push your stellar team to the forefront to give investors confidence you can take this to the finish.
High infrastructure companies that will serve industries outside It, such as healthcare and finance, where big opportunities lie. There are big obstacles, too usually regulatory, which means revenues may be delayed by legalities, but the need for highly focused team remains. Here investors will be looking for direct vertical knowledge; again team members’ resumes inspire confidence.
- Free consumer apps which need lots of users and high engagement and retention rates. If this is your start up, make sure you have convincing strategies for getting millions of users and a high-level plan for future monetization. There is a lot of competition in this space. You will be benchmarked against them for user base growth and user engagement. This is not the time to talk about your brilliant engineering team. Instead focus on how you are attracting and engaging customers. In other words, ‘Traction’.
- Everything else covers a lot of companies that Yins says can and should generate revenue right out of the gate. Potential investors want to know how yours will do that. Again, this is not the time to put your team of engineers forward, but instead talk about your market, traction, and go-to-market strategies.
Can you see now how important knowing where your start up actually fits on this spectrum when you approach potential seed investors?
- Be bold. Ask the tough questions, such as “are you interested in my company?” upfront, so you don’t waste your time with an unlikely investor.
- Know what your start up is – a super high tech or a free consumer app – and present your team or traction to resonate with a likely investor.
- Don’t waste your time being ‘column fodder’ or ‘brain dump’. Talk only to investors likely to fund you.