By Jack Perkins, Founder at CFO Hubproviding on-demand CFO, controller, accounting and HR services.
Whenever entrepreneurs prepare to compete for money — caught in the swirling chaos, nervous excitement and mounting pressure — it’s easy to forget that a pitch meeting is a two-way conversation.
While you may be tempted to jump on your first offer, remember that capital is not given freely. There are costs involved. You give up some equity and control in exchange for seed capital. 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 if you are a strategic fit for their fund. But to get the ideal partner, you have to return the favor in kind.
The questions you ask can be as revealing as the questions you answer. To that end, here are five questions to ask before you break out the term sheets.
1. How big is your fund and how much do you usually invest?
Different types of investors will have different levels of resources and investment preferences. An angel investor may prefer to write hundreds of thousands of checks, while a private equity or venture capital firm may operate in the tens of millions.
The archetypal investor profile depends on your specific needs.
So your first task is to determine whether is financial coordination between the interests of both parties. While your initial research should provide an estimate of their typical investment behavior, asking these questions confirms that:
† The investor has access to the capital needed to finance your business.
† The investor could potentially make follow-up investments in the future.
† The investment is big enough to be worth their continued interest and involvement, but not so much as to overwhelm them.
2. What percentage of the meetings lead to term sheets and from there to checks?
Fundraising can be an exhausting, time-consuming process. A DocSend study found that a typical round of seed lasts an average of 12.5 weeks for a $1.3 million increase.
Chances are, you’ll need to make several pitches before you find an interested and like-minded investor. Therefore, managing expectations is necessary to endure the trials and tribulations of a capital increase.
By asking this first question, you can estimate how likely it is that the first meeting will actually go somewhere or that it will be a silly message. The follow up will give you an idea of how serious a termsheet offer is. Also, a low percentage can 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 are a medical device company. Would it make sense to pitch for a private equity firm whose portfolio consists primarily of renewable energy investments?
Probably not. And even if there used to be a mutual interest, there are probably even better options available.
An investor should not just be seen as a check; the best partner will offer more value than money. They can provide industry connections and strategic insights or even provide hands-on support and guidance as you scale. If they are willing to invest but don’t want to cover the full raise, they may be able to put you in touch with other interested investors who can bridge the funding gap.
4. Can you put me in touch with someone in your portfolio who failed?
It’s easy for two parties to get along when everything goes according to plan, but what happens when things fall apart? How do both sides react with money and egos to the game?
As Samuel Smiles once wrote, “We learn far more wisdom from failure than from success.”
If a company accepts this proposal, it demonstrates transparency, a willingness to admit mistakes and confidence in its past behavior. Should they put you in touch with an entrepreneur, take the opportunity by asking revealing questions such as:
† How did the investor behave during the process?
† Do they provide enough support?
† Were they encouraging?
† Did you feel like you had a teammate or an opponent?
† What would you have done differently?
† Would you have worked with them knowing what you know now?
You don’t have to take their story as gospel truth – after all, time, tragedy and bias can distort memory. But having an open conversation can at least give you an idea of the investor’s character when plans derail.
5. What are your main concerns about our company or product?
During a pitch meeting, it can be difficult to identify the genuine interest of a potential investor. You might leave the room feeling like you made their commitment, only to get a soft answer later.
Instead of waiting for the “we like what you do, but…† conversation, avoid objections or criticism. Confront them from the start. By doing this, you demonstrate your confidence and willingness to take on challenges.
They may have scruples that you could easily crush. But if left unheeded, those concerns could be the factor tipping the scales — and not in your favor.
Ace your pitch meetings.
A pitch meeting is more than an opportunity to raise much-needed funds – it’s your chance to find a long-term strategic partner.
If you want to win the meeting, be confident and willing to ask questions. Remember, you’re also delivering something of tremendous value. The right partner could maximize that value. But the wrong one can cause more trouble than they’re worth.
With so much risk, you need to vet them as carefully as they vet you. And by asking questions like those discussed above, you can achieve that.