Most often than not, even though the investors have already gone through a startup’s pitch deck and did their research, they still have unanswered questions.
For investing in startups involves a substantial amount of risk, startup investors want to be 100% sure that they’re investing with the right startup.
This blog post will discuss the ten questions to ask before investing in a startup.
Top 10 Questions to Ask a Startup Founder
1. What’s Your Management Team Like?
A startup company may not survive for long if there are problems within the management team. 23% of startups fail due to the incompetency and inconsistencies of the management team. If the people in the team don’t know how to do the job well, the startup will suffer as a result of this.
Both the founders and the team should have the skills and knowledge related to the business. The skills they possess should be complemented with that of the team.
Startup investors will also want to know if the entrepreneurs are working on their business full-time, which shows that they are strongly motivated to solve a particular problem. A founder with a prepared fallback won’t chase profitability with the same hunger as an entrepreneur who cannot afford to fail.
Therefore, asking what the team is like when working together is a crucial question to ask for these are the people whom you will most likely work with in order to create a successful business.
2. Is There a Market for Your Startup’s Product?
One of the most prevalent reasons for startup failures is the lack of market demand. The startups usually look into this aspect in the early stages of product development. If the founders have not conducted their market research properly, their chance of failing is high. They should be able to determine the purpose of their product, the problems it can solve, and their target market.
A startup starts by developing a product or service and eventually introduces it into the market where they have no potential customer. The most significant mistake that most startups make is believing that their ideas are appealing enough to create market demand, and inventing a product that does not solve any existing problem or is irrelevant to the market.
Launching a business with services/products that are not well-thought-out can lead to joining the other 42% of startup failures. These statistics show that failing to recognise the importance of market demand is one of the fastest ways to guarantee failure.
3. Why Did You Decide to Create this Startup?
Knowing the ‘WHY’ behind a startup is often what gives the investors motivation to invest. It gives them an insight into the startup’s core principle.
Startups setting out their values and principles give the investors a way to measure how well the founders are doing to meet their set goals in a way that will enable them to take action to ensure that they are delivering as effectively as possible.
One example that can support this claim is the journal entitled ‘It’s a Matter of Principle: The Role of Personal Values in Investment Decisions’ by William Pasewark and Mark Riley. In which they investigated the role of personal values in an investment decision.
They asked the participants to pick an investment in a bond issued by a tobacco company or a non-tobacco company that offered an equal yield. They surveyed the participants regarding their feelings toward tobacco use to determine whether these values influenced their investment decision.
Using factor analysis, they identified that the relationship between the health effects of tobacco and the societal impact of investment decisions were highly significant in determining whether the participants choose tobacco or non-tobacco related investment.
Furthermore, choosing a startup with the same values and principle as you will make the work much more manageable since something deeper is connecting the founders and the investors.
4. What Milestones Has Your Startup Already Achieved?
A startup with a great idea, a solid business plan, and a fantastic team can be deserving of receiving an investment. However, a startup that has already achieved something is more likely to win an investment and go on to dominate their market.
Is the company already serving the largest client in the business? Does an industry titan back them? Did the founders sell a startup or build something huge in the past that failed? These startups are the kinds to invest in, and they could provide you portfolio- defining returns.
Thereby, asking this question will help you take a glimpse of how quickly a startup founder can expect a return on their investment.
5. Where Will They Invest My Investment?
Ask how the startup founders will use your investment capital and what progress it will make to the company. It will help you gauge how good they are in handling their finances.
Most investors want to know how their capital will be used, and also the company’s burn rate. Will they use the money to develop their service or product further? And how will they do this?
This will also allow the investors to test whether the company’s fund-raising plans and estimate of cost are reasonable given their experience with other companies.
6. What Key Metrics Will Tell You That You’re Gaining Traction?
Having effective key performance indicators are essential metrics to make sure that a startup can accomplish any business objective. KPIs are more than just numbers reported out weekly - they enable founders to understand the health and performance of their business so that they can make critical adjustments in their execution to achieve their strategic goals.
If the startup is gaining more customers (either new, repeat or referrals) every month, then it’s safe to say that the strategy they are using is very much effective.
Therefore, asking this question will basically help you see whether or not the startup founders have a plan to build and scale.
7. Who are Your Other Investors?
The purpose of asking for other startup investors is to learn if someone you know is also investing in the company.
Most investors are more likely to invest in the same startups that their friends or people whom they know invest in. Through this, you would know if a savvy investor is also investing in the company.
8. What are the Potential Risks of Your Startup?
Investors would want to understand what potential risks there might be to the business. Asking questions like “what do you see as the principal risks to the business?” and “what steps do you plan taking to mitigate such risks?” will help you understand the founders’ thought-process and the mitigating precautions they are planning to take to reduce the risks.
Having such risks is part of founding a startup business. However, investors prefer to hear it straight from the founders. The ability of the startup founder to answer this question will give startup investors insight into how transparent they are.
9. Are You SEIS Registered?
Seed Enterprise Investment Scheme (SEIS) is one of several UK government’s initiatives which encourage innovation by granting private investors a tax break when investing in early-stage, ‘high-risk’ companies.
It focuses on early-stage companies and allows an individual to invest up to £100,000 per tax year and to receive a 50% tax break in return. The investors will also benefit from a capital gain tax deduction on any profits that result from the sale of shares after three years.
Asking if a startup is SEIS registered will ultimately help you mitigate the risks of investing in a startup by qualifying and claiming tax relief.
10. What sets you apart from your competitors?
People often say not to pay attention to your competitors, and while some competitive business owners don’t mind this, others might be obsessing over the fact that competition is not healthy. Completely ignoring this essential element will add the company to 19% of the startup failures. But it doesn’t mean that the company should be overly concerned about the competition. There should be a balance between overconcern and ignorance.
If the startup owners were able to answer this question, it only shows that they were aware of who their competitors are and their capabilities. They are aware of their competitors’ strengths and most especially its weaknesses because they could use it against them. But if a startup is trying to find funds without ever knowing its major competitor, then it’s a red flag.
Take Facebook as an example of a startup company that outcompeted their largest competitors.
In July 2005, Rupert Murdoch’s News Corporation purchased Myspace for $580M back when membership at Facebook was still restricted to college students. According to Comscore, in May 2007, Facebook’s unique monthly viewers were just 30 million, while Myspace was at roughly 70 million.
In May 2009, Facebook met and surpassed Myspace’s unique viewers, which had remained at 70 million. By May 2011, Facebook had nearly 160 million users. Meanwhile, Myspace has dropped below 40 million users, and that number kept falling. In June 2011, Murdoch sold the dying company for $35 million, 93% less than the original purchase price.
Investing in a startup is not a subjective decision, therefore, before deciding to invest your hard-earned money, it is necessary that you take into account all the facts, figures and skills that can help the startup founders turn their ideas into reality.
Not all startups end up being Uber and Google, and that's why it is strongly recommended that would-be investors should consider certain factors and have their own standard to decide whether a specific startup is deserving of investment or not.