A LIST OF 45 QUESTIONS YOU MUST ASK BEFORE RAISING MONEY
Many entrepreneurs often think that fundraising is a one way street: an investor picks their company to invest in. Smart entrepreneurs know that taking checks is really a matchmaking exercise. Just as an Angel or a firm conducts “due diligence” on you and your business, you should also be conducting your own due diligence on them.
Typically, there are three stages of the process:
- The Homework Stage — This is the stage before you take any meetings and you’re just looking for the FACT criteria, as outlined below (my acronym for information you need to confirm before you take a phone call, get in a car or on a plane to meet any investor).
- The Meeting Stage — This is the stage before you negotiate terms where you try to identify if this person’s vision aligns with yours, what kind of value they bring to the table and how this person is to work with.
- The Negotiation Stage — You never really know someone until you have to negotiate and compromise with them. This stage allows you to see how this person is to work with when you’re on different sides of the table. I’ll discuss this in another blog post (as it warrants a section for itself).
The Homework Stage
Treat this stage like a sales exercise. You wouldn’t keep pursuing a sales client if they didn’t meet the BANT Criteria. So don’t keep pursuing investors if they don’t meet the F.A.C.T. criteria. Most of this you can google, but if you can’t find it, get a warm introduction (through LinkedIn or Email) and schedule a call.
- What stage do they invest in (Seed, Series A, Series B+)?
- What is the market focus or thesis of the fund?
- Does your company honestly fit into that thesis? (e.g. If you’re a Biotech company pitching a purely FinTech firm…you’re pitching the wrong people).
- Does the firm invest in your geography?
- Does the person you’re talking to have the ability to write a check?
- If so, are you talking to the right Partner within the firm (with the right background of experience who has made similar type investments)?
- Have they invested in any competitors?
- Have they invested in any companies that are not competitors today that might be competitors in the future (e.g. is there a potential conflict of interest)?
- How many investments have they made in the past 12 months?
- How big of a fund are they investing from (e.g. $10M, $500M or somewhere in between)?
- How old is the fund that they’re investing from (e.g. do they have more money to invest out of that fund or are they in the middle of raising a new fund themselves)?
- If they’re raising a new fund, how close are they to closing that fund? When can they start writing checks from it?
- What is their usual check size (e.g. is this person going to make a material dent in getting you towards your goal in a reasonable timeframe)?
The Meeting Stage
In this stage, you’re confirming all the above, but also getting into the weeds of starting to learn how this person or firm thinks about their own investments.
Identifying the Value You Will Get (Money + Beyond):
- What do they see as their key value (besides money)?
- Which partner will be most involved post-investment?
- Are other partners available to talk to post-investment if questions come up (even if they’re not your partner)?
- Do they seek to lead rounds?
- What is their typical target ownership?
- How much money do they allocate to new portfolio companies vs. follow-on rounds?
- Do they keep any money in reserves per each investment? If so, how much?
- What % of portfolio companies have they followed-on with?
- What milestones will they track to determine if they’ll follow on in your next round?
- What is the fund’s policy on board seats?
Prepping for the Due Diligence Process:
- What are the key requirements/documents they need to see for due diligence?
- What does the investment process look like?
- What days are partner meetings (i.e. days when entrepreneurs typically come in to meet and pitch all the partners — and days where partners discuss if they’re going to invest or pass on an investment)?
- On average, how long does it take to close an investment? Whats the longest time? Whats the shortest time?
- How do things typically work post-investment?
- How hands-on are they?
- How often do they like to get updates from founders?
- What is the firms expectation around exists (do they expect you to build and sell OR try to go for the IPO)?
- What happens if you’re almost out of money and you need $XXXK or $XM more to get to the next milestone before you raise your next round?
- Have they participated in a bridge-round? If so, how many times?
- How have they handled companies that have struggled?
- What have been some of their biggest wins and losses? What made the winners, winners (in their opinion)?
Rounding Up Checks:
- Who does it take at the firm to green light investments (just one partner, all partners, etc.)?
- Anything you should know about any of the other partners before meeting them?
- Who have they co-invested with in the past (i.e. you’re asking to see if they can make any other helpful introductions during the fundraising process)?
- What other investors do they recommend you talk to (i.e. is this person/firm going to be helpful)?
- Do you like spending time with the partner you’re dealing with?
- Does the partner respect you, as an entrepreneur and on a human level?
- Do you learn something new OR do they help you think about your business in a better light?
- Scenario: You have 6 months left of burn, you don’t quite have metrics to raise your next round so you know you need to start fundraising for a bridge. You’ve worked your ass off for the past 3 months to get everything to a point where it will keep working as you divert your attention to fundraise for the next 3–6 months. All of a sudden your [INSERT: Mom, Dad, Husband, Wife, Sister, Daughter] is admitted to the hospital on the other side of the country for something pretty serious and the doctors are unsure of how the situation will play out. First, how does the investor respond to the situation (are they human)? And what does this investor tell you to do?
- Will this person “go-to-bat” for you by making introductions to new sales prospects or picking up the phone to call their investor friends when you’re looking to raise a new round?
One Last Thing:
- Have them introduce you to three founders they’ve worked with or invested in. ** This is critical. You wouldn’t hire someone you didn’t do a reference check on. Don’t take money from someone you don’t have a reference check on either. **
Now, armed with a host of questions, you’ll be well on your way to obtaining the answers about investors/firms who will likely have an opinion on all matters relating to your life and how you spend your time.