When it comes to raising capital for your startup, finding the right investor is as critical as securing the investment itself. The relationship you build with your investors can significantly influence your company’s growth and success. To ensure you’re partnering with someone who aligns with your goals and values, it’s essential to ask the right questions during your initial meetings. Here’s a comprehensive guide to help you ask the critical questions that will provide insights into potential investors and help you make the best decision for your business.

1. What is Your Investment Thesis?

Understanding an investor’s investment thesis—their strategic approach and focus—is crucial in determining alignment with your startup’s vision. An investor with experience in your industry or one actively seeking opportunities in your sector is more likely to have a vested interest in your success. When an investor’s thesis aligns with your company’s goals, it increases the likelihood of a successful partnership and can lead to more substantial support, both financially and strategically.

2. What Types of Startups and Industries Do You Typically Invest In?

By asking this question, you gain insights into whether the investor’s portfolio includes companies similar to yours. This is particularly important because an investor who has previously invested in your industry will likely understand the unique challenges and opportunities you face. Their experience can provide valuable guidance and increase the chances of your startup thriving under their wing. Moreover, if they have a successful track record in your industry, it’s a strong indicator that they may be a good fit for your business.

3. What Stage of Startups Do You Typically Invest In?

Investors often specialize on specific stages of startup development, such as Seed, Series A, B, C, and late-stage funding. Understanding where an investor focuses their capital will help you determine if they are a suitable partner for your current stage of growth. For example, if you are in the early stages of your startup, it’s crucial to find an investor who is interested in early-stage companies rather than those who only invest in later-stage businesses. However, forming a relationship with such an investor now can be beneficial when your company reaches a later stage, even if they don’t invest immediately.

4. Can You Share Your Most Successful Investments and What Contributed to Their Success?

This question allows you to evaluate the investor’s track record and understand their strengths. Learning about their successful investments can provide insight into how they contributed to the growth and success of those companies. It also helps you gauge their expertise in identifying and nurturing startups with potential. An investor with a strong history of successful investments is likely to bring valuable experience and resources to your startup.

5. Can You Discuss Some Investments That Did Not Succeed?

Understanding how an investor responds to failures is just as important as knowing about their successes. This question can help you identify potential red flags, such as a tendency to provide less support in challenging times, hesitant to provide follow-on funding, a focus on short term gains, or to push for strategies without sufficient rationale. It also provides an opportunity to learn how the investor might support your startup during difficult periods, offering insight into their problem-solving approach and resilience.

6. How Large is Your Fund and What is Your Typical Investment Size?

Knowing the size of the investor’s fund and their typical investment range is critical for understanding their capacity to support your startup. A larger fund may offer more resources, but it might also mean the investor has a more extensive portfolio, potentially leading to less individualized attention. Conversely, a smaller fund may provide more personalized support, but could have limited resources. This question helps you assess whether the investor can meet your startup’s current and future funding needs.  Additionally, it is ideal for you to align with an investor that can provide you with the investment amount that you’re looking for to fit in your current round.  Keep in mind that a smaller fund could also be included in the round as an additional investor if they are not the right fit as your lead investor.

7. What is Your Fund’s Timeline for Exit?

Every fund has a lifecycle, typically lasting around 10 years. It’s essential to understand where the investor’s fund is in its lifecycle and their timeline for exit. This information can help you align your growth strategy with their expectations and avoid potential conflicts down the road. For instance, if an investor is nearing the end of their fund’s life, they may push for a quicker exit than you are comfortable with.

8. How Involved Are You with the Companies You Invest In?

Investor involvement can vary widely, from hands-on mentoring to a more passive approach. It’s important to know how engaged the investor plans to be with your company. Some entrepreneurs prefer investors who actively offer advice and connections, while others may value the freedom to operate independently. Understanding the level of involvement the investor expects will help you determine if their style aligns with your needs.

9. What Are Your Thoughts on the Current Market for My Startup’s Industry?

This question serves a dual purpose: it assesses the investor’s expertise in your industry and provides you with valuable market insights. An informed investor will have a deep understanding of current trends, risks, and opportunities in your sector. Their perspective can help you make informed decisions about your company’s direction and strategy.

10. What Are the Most Important Terms for You in Your Investment?

Understanding the key terms that are non-negotiable for the investor is essential for preparing for negotiations. These terms typically involve financial, business, and legal aspects of the investment. Being aware of what is most important to the investor allows you to focus your negotiations on areas where there may be flexibility. You should also be prepared to provide your own list of terms that are most important for you to provide in return. For most founders, the key terms often revolve around valuation and control of the company.

11. Can I Speak to Some of the Founders of Companies You Have Invested In?

Speaking directly with other founders who have worked with the investor provides invaluable insights into what it’s like to have them on board. You can learn about the investor’s work style, level of involvement, and overall impact on the company. This first-hand feedback can help you confirm whether the investor’s reputation and approach align with what you’re looking for in an investor.

Why Consulting Your Attorney is Crucial

Before entering into negotiations, it’s highly recommended to consult with your attorney. An experienced attorney can help you navigate the complexities of a term sheet, ensuring that you understand what is standard in the market and where you might have room to negotiate. They can also provide strategic advice on how to balance your needs with maintaining a positive relationship with your investor. Remember, your investor wants your company to succeed, so finding a balance between securing favorable terms and fostering a collaborative relationship is key to a successful partnership.

Ready to Discuss Your Investment Strategy?

If you’re preparing to meet with potential investors and need guidance, or if you have questions about your legal options, don’t hesitate to reach out. At Momentus Legal, we specialize in providing startups with the legal support they need to make informed decisions and secure the right partnerships.

Contact Rayna for more information:

• Email: rayna.sparkes@momentuslegal.com
• Phone: 541.221.8580
• LinkedIn: @RaynaSparkes 

Ensuring that you ask the right questions and seek the necessary legal advice can make all the difference in your startup’s journey to success. Partner with us at Momentus Legal to navigate the complexities of raising capital and building a strong foundation for your business.