What questions should you ask seed investors?

I’ve ragged on investors quite a bit in my recent posts here and here.

But fundraising meetings are a two-way street.  Entrepreneurs also need to do a much better job pitching.  Specifically, I’ve noticed that many first-time entrepreneurs do not ask any questions.  This is a serious mistake.  Entrepreneurs should learn everything they can about an investor.  Taking investor dollars shouldn’t be done lightly.

You don’t want to take money from bad apples because down the road when things get tough, investors can:

• Call their convertible note
• Potentially replace you (depending on the equity and board situation)
• Threaten litigation (even if they have no case)
• And most importantly, be a big pain in the ass and call you all the time

You are looking for a relationship – not just money.

Before taking an investor meeting (or even reaching out), you should definitely do your homework and research investors.  Make sure to reach out to investors who are actually a good fit for your business (stage, sector, amount, what they look for, etc).  Most websites will spell this all out – especially newer microfunds who are trying to differentiate themselves in the market by going after a specific niche.

In addition, here’s a list of questions you should ask investors when you meet them:

• How big is your fund? (for VCs)
• Where are you in your fund?  (for VCs)
• When will you need to fundraise again? (for VCs)
• Do you lead rounds? (for VCs)
• What is your typical check size?
• Do you reserve capital for follow-on?

This gives you a sense of how much money you can raise from a given firm or individual.  This is really key because there are a lot of investors out there who have no money but are still taking meetings.  It’s OK to take a meeting with an investor who has no money to invest, but you should know that they won’t be able to come into your round until they have raised money so your meeting might not lead to anything.

Understanding how much is allocated for follow-on investments also gives you a sense of how much money is left in a fund.  If a fund is $10M and two-thirds is reserved for follow-on, then in practice, there’s $3M for first checks.  If the firm has already deployed $2M, you know that your chances of getting a first-check is slim…

In general, it’s slightly easier to raise from funds that have just raised a fund.  They have a lot of money that needs to be deployed, and so they are more eager to invest.  In contrast, when there are fewer dollars left to deploy, those last dollars will be extremely competitive.

You should find out an investors’ cadence:

• How many seed deals have you done in the last 6 months?
• How many seed deals do you anticipate doing in the next 6 months?
• How long does your process typically take?

And how decisions are made:

• What is involved in your process?
• Who is the decision maker?  (for VCs, although sometimes angels need to consult their families or friends)

By the end of the meeting, you should understand

• Everything about an investor’s decision making process
• Whether you have a champion to take this to the decision makers (whether it be partners at a firm or their family)
• What the concerns are with your business in their eyes
• What the CONCRETE next steps are

If you do not have answers to ALL of these questions, keep asking questions…