3 Really Good Questions to ask an Investor
by Wil Shroter
Entrepreneurs are used to getting grilled by investors about their startup ideas. So much so, that they rarely seem to ask any questions themselves.
Yet if you really started asking some hard questions, you may be surprised at how lame some of the answers you get are.
Here are three that may have you wondering whether or not the guy across the table knows what he’s talking about:
1. How many exits have you had?
Investors, particularly venture capital investors, are all about the “exit” or sale of a company. While building a company that lasts and throws off cash is useful to the Founder, the partners in a venture firm only get paid when the company sells.
So the question is – how many times have you been successful as an investor?
Believe it or not, many investors will start to sidestep this issue because frankly, it’s hard to be successful as an investor. Don’t let them off the hook.
Keep drilling down about their successful investments. When did they invest? How were they involved? Did the existing management change? How much did they take off the table when it was sold?
Investors often let entrepreneurs assume that if they make investments, they must be good at it. They may be, or they may not be. Make them prove it to you. The good ones have no problem with this question.
I remember when I was pitching to Sequoia Capital for Swapalease.com, they had the “tombstones” of every company they had taken public in their lobby – Google, Electronic Arts, PayPal, etc. I think that pretty much spoke for itself!
2. Where have you been successful?
This is a two-part question. It’s not just about whether or not the investor has been successful in their career (do not assume they have) but whether or not they have been successful at whatyou’re doing.
Back to the Swapalease example. When I pitched all the partners at Sequoia, you could tell they knew the business of Web companies backward and forward. They asked all the right questions. Other VC’s (I won’t name any) kept asking really inane questions about how an Internet company works.
The difference is not only the quality of the firm, but how well they understand your industry or business.
If they are asking fundamental questions like “how does search engine marketing work?” while you’re pitching your Web company, you’re probably in the wrong place. If they are asking “what is your Cost Per Acquisition for paying customers across the different search engines” then you’re probably closer to the right fit.
Your ideal investor has been successful in a business just like yours. Not surprisingly, most investors invest in businesses that they have made money in previously, since they understand the path to success.
3. What do you bring to the table?
Let’s assume all investors bring money to the table, so that’s a given. What really separates investors is what they bring with it.
A good investor has very obvious connections to customers, partners and media outlets. They will tell you exactly where they are connected. A crappy investor will give you general answers like “we are very connected” yet won’t tell you exactly who they are connected to and how.
I’m not suggesting asking for a copy of the firms’ contact list, but it’s fair to ask what companies they are sitting on the boards of, have invested in, and have an ongoing relationship with.
What you’ll often find is that most investors don’t have much more than cash. In most cases you’re so worried about just getting a check that you don’t even think about these questions. But it doesn’t hurt to ask.
It proves to investors that you are sizing them up as much as they are you. It’s also a good indication that you are as serious about finding a solid partner as they are.
Don’t be afraid to shake the investors up a bit. It keeps them honest… sort of.