What Questions Will Investors Ask?

During a capital raise process, your going to get asked a ton of questions about your business.  As the CEO, you should be able to answer most questions.  Below a list of high-level questions to help you prepare.

Company History

  • When and why did you found the company?
  • Walk us through the development of the Company from founding to today.

Product

  • Discuss the current product/service offering
  • What is your pricing structure?
  • What are your standard contract terms?
  • How does your pricing compare to competitors?

Customers

  • Who are your target customers?
  • How many customers do you have?
  • How do your customers make decisions?
  • How do you communicate your value to your customers?
  • What percentage of your revenue are your largest and top 5 accounts?
  • How much opportunity is there to increase revenue from existing customers?
  • What’s your average customer tenure?
  • What is your historical attrition rate? What about from a revenue attrition standpoint?
  • Discuss concentrations in the base (geographic, industry, type of customer, etc.)

Sales

  • Discuss the composition of your sales organization.
  • Walk through your typical sales process.
  • Where do leads come from?
  • How long is the sales cycle?
  • Who’s the decision maker at the customer?
  • What is your sales conversation rate?
  • What is your customer acquisition cost?
  • How large is your current pipeline?
  • What percentage of your projected revenue is already booked?
  • How do you compensate the sales team?

Growth

  • Where do you see the business in five years? What about ten years?
  • Walk us through the growth strategy.
  • Walk us through the product/service development roadmap.

Market

  • What do you view as the total addressable market size?
  • What is driving the adoption of this type of solution in the market?
  • What will drive demand for this product/service over the next 5-10 years?
  • Who are you bumping into in competitive situations?
  • How are you differentiated from competitors?
  • What % of the market do you currently have?

Employees

  • Where do you spend most of your time?
  • Who are the key team members?
  • Are there any gaps in the executive team?

Financial

  • What has driven revenue growth over the past few years?
  • What does your SG&A consist of?
  • Walk us through the headcount by department.
  • What is your gross margin %.
  • What’s your cash conversion cycle look like?

Transaction

  • What does your ideal transaction look like?
  • What are management’s plans going forward? Do you want to stay on, transition, out, etc?
  • How much capital would you like to take off the table?
  • How much capital do you need to achieve the growth outlined in the projections?
  • How much capital has been raised to date?  Who are the outside investors?
  • What valuation are you expecting?
  • What are the use of proceeds?

Other

  • Do you have any outstanding or pending litigation?
  • What is the corporate organizational structure? (LLC, C-Corp, etc.)

How to Evaluate Investors

For entrepreneurs who are beginning discussions with investors, here are the key questions you need to ask yourself to evaluate which investor make sense for your business.

Does the investor pass an initial sniff test?

Google the firm before you agree to a call or meeting.  Nearly all reputable investors have an online presence.

While information on firms’ websites is limited, you can determine high-level investment profile and criteria.  If your business and transaction interests don’t align, then you will likely waste your time talking to the investor.  If you get past initial conversations, it’s essential to do a background check on the investor by talking to their existing and past portfolio companies.

Does the investor deploy the type of capital and invest in the kind of transaction you want?

Even if you’ve researched the company thoroughly, sometimes websites aren’t in line with the types of transactions investors actually do.  Make sure you understand if your desired transaction is in-line with the investor’s typical investment profile.

Does the investor’s typical investment size line up with your business?

As a general rule of thumb, investors invest about 10% of their total fund in each portfolio company.  If an investor has a $100M fund, it is a safe assumption they are looking to put $10M to work in each deal they do.

Can the investor help you meet future goals with follow-on capital?

Companies need additional capital for all sorts of reasons. Sometimes it’s because the company is struggling, other times it’s to fund growth initiatives such as acquisitions. Make sure you understand whether or not an investor has the ability to fund additional cash.  FYI – If an investor is nearing the end of its fund and hasn’t started raising an additional fund, they may be out of cash.

Are you comfortable with where the investor’s capital comes from?

Traditional investment firms raise a dedicated fund from high net worth individuals and institutional investors.  This is committed capital the investor draws down on for each deal.

However, some firms never raise a committed fund and are instead set up as “fundless sponsors”  Fundless sponsors are either 1) pledge funds, who sign up a deal then raise capital, 2) investment clubs, which have a group of individuals who participate in deals on a deal by deal basis, or 3) family offices.

Whether it’s a traditional investor or a fundless sponsor, inquire as to who the underlying investors are and make sure you’re comfortable with it.

Do you understand the investor’s management style?

Some firms are very involved in the day to day operations while others are passive investors who leave running the company up to the management team.

Are you comfortable with the investor’s oversight requirements?

There are two types of oversight requirements: Board seats and Reporting.

Investors will require management to share information on an annual, quarterly or even monthly basis.  Ask for an example of existing portfolio reporting.  This will help you understand the time commitment and resources needed to comply with oversight requirements.

Most investors will require at least one board seat.

Does the investor provide something other than capital?

Investors will differentiate themselves by offering value-added capabilities. This is anything from a network of relationships, bulk purchasing power, operational resources, etc.

Are you and the investor on the same page for the strategic plan for the business?

If you are still running the business, get a clear understanding of the investor’s goals.  Are you on the same page with the growth strategy?  Do you understand if the investor is going to push for cost reductions?

What is the firm’s track record?

Do the firm and the partners involved have a track record of success? Have they profitably invested in and helped build businesses?  Probe on the key partner’s experience.

Can you work with these people for the next few years?

This is probably the most important of all questions.  Do you want to partner with this firm and the people who represent it? Reflect carefully on each of your interactions with the firm.  Ask for references from existing portfolio company executive teams to hear about their experiences.

Additional Questions to Ask During Initial Meetings:

  • What is your background?
  • What industries/sectors are you focused on?
  • Do you lead rounds?
  • Do you co-invest with other investors?
  • Who have you co-invested with?
  • What does your typical investment process look like?
  • How long does your typical process take?
  • What does your diligence process look like?
  • What does the decision-making process look like?
  • Who is involved in the diligence process?
  • Do you require a board seat?
  • Who would be the board members?
  • Can I speak with a few of your existing and past portfolio company CEOs?
  • How often have you had to replace the executive team?
  • Is my business a fit with your investment strategy?
  • What do you find interesting about my sector/space?
  • How do you support your portfolio executive teams?

Best Practices for Introductory Investor Meetings

Here are a few best practices to keep in mind for early investor meetings.

Your primary goals

You have two goals: 1) Sell the merits of your business as a compelling investment opportunity; and 2) Determine whether you want to partner with the investors in the room.

Do your homework

Spend at least 15 minutes researching the investor by checking out their website, looking at press releases, and the LinkedIn profiles of the folks you will be meeting with.

Recommended meeting cadence

Set up a 30 min introductory call or meeting.  Follow up with a 60-minute more in-depth discussion.

Attendees

Only include the CEO/Founder for initial calls.  It’s awkward having a ton of people on the line who contribute very little to the conversation.  Further, there is no question during an introductory meeting that the CEO shouldn’t be able to answer.

For follow-up meetings, involve team members as appropriate, but make sure it’s a good use of their time.  No one should be in early meetings if they don’t have a significant speaking role.

Confirmation and material sharing

Send the investor deck a few days in advance of the discussion to give the investor time to read through the materials.  Confirm agenda, call time and attendees the day before.

Never trust technology to work properly

Always have a backup option in case technology fails. Get to the meeting early to set up.

Meeting structure

Let the investors give their introduction first.  This will allow you to get a better sense of their knowledge of your sector and what they are looking for in companies and adapt your presentation accordingly.

Give your introduction, the company overview, and then end with at least 10 minutes for Q&A.

Come up for air

Don’t talk the entire meeting.  Try to keep the pitch as conversational as possible and pause for questions between sections of your pitch.  Investor interest is usually directly correlated to how many questions they ask.

Stay calm and confident

Don’t let probing or rude questions get you flustered.  Keep calm, answer to the best of your ability and move on.  If you can’t answer a question, offer to follow-up with the right answer.

Determine next steps

Ask what next steps are for the investor.  You need to figure out whether the investor will likely move forward in the process and what internal processes look like on their end.

How to Get in Front of Investors

Getting in front of investors is the kickoff of your marketing phase.  If you’ve hired an investment banker, they will manage this outreach on your behalf.

Despite what it may seem like, it is not difficult to get in front of the right investors for your business.  

Investors are literally in the business of putting money to work.  Without taking meetings with entrepreneurs, they can’t do that.  The key is knowing how to get in front of investors.  Here’s the right approach that works for most businesses:

  • Directly reach out to any existing connections you have within your target list.  These are folks you’ve met with in the past, so it should be easy to get a meeting/call.
  • Get referrals from folks in your existing network who are connected to investors on your target list (existing investors, lawyers, advisors, consultants, board members, etc.) LinkedIn is a great tool to help with this.  In creating your list you should have already asked your network for recommendations, so there should be some built-in intros here.
  • Actively cultivate new relationships with individuals who have connections to the investor community and may be willing to connect you to investors. This includes other entrepreneurs, investors, angel investors, company executives.  Get to networking.
  • Get yourself some PR coverage for your business before launching a capital raise process.  This could help spur folks reaching out to you and is a good momentum builder.
  • Ask investors who pass on your deal for introductions.  Investors and other professionals often refer potential opportunities to each other.  Even if an investor isn’t a fit for your business, they may be able to direct you to other investors that could be a better fit.
  • Use events and conferences.  If there is a big event for your industry that you know a lot of investors attend, use this as an opportunity to reestablish existing connections and make new ones.
  • If all else fails, cold call.  If you cannot find a warm introduction to an investor, cold call/email the investor.  You should typically start with an email. Keep your message short, to the point and request a brief introductory conversation.  Get a direct email address for one individual at the firm (which you can usually find with a Google search or on the firm’s website). Don’t bother sending an email through a general submission inbox as these are typically cluttered with spam.

What to include in a cold call/email:

  • Your name and role
  • Your business’ name
  • A max two sentence description of what your business does
  • One sentence on the stage of your business and traction to-date
  • The type of transaction you are pursuing
  • Why you’re interested in talking with this particular investor and a request for a short introductory call
  • Link to or attached summary materials

What not to do when getting introduced / cold-calling investors.

  • Do not get a massive list of investors and spam all of them. This is a waste of time and effort.
  • Don’t act like a dick if you get pushed to a junior-level employee at the firm.  Junior level employees are often gatekeepers and the first step in developing a relationship with investment firms you don’t already know.
  • Don’t email every person at the same firm at the same time.
  • Don’t ask multiple people at the same time to make a connection to the investor.

How to Create a Target Investor List

Getting in front of the right investors is a crucial step in preparing for a capital raise, but this is where most entrepreneurs tend to spend the least amount of time. Once they have marketing materials in-hand, many entrepreneurs hit the ground running, taking any meetings they can get with investors.

This haphazard approach is a mistake and a waste of time. This post will walk you through a smarter approach to identifying the right investors.

Create a Target Investor Profile

It’s a waste of time to talk with investors who will never invest in your company.  To prevent setting up meetings with these investors, first scope out your mandatory investor characteristics.  Here are the primary ones:

  • Transaction type – Does the investor invest in the kind of transaction you want to pursue (growth capital, buyout, debt, etc.)
  • Capital type – Does the investor invest with the type of capital you are looking for (equity, debt, etc.)
  • Company stage – Does the investor invest in your stage of business?
  • Investment size – Does the investor invest the size check you need?
  • Industry focus – Does the investor focus on your industry?
  • Location – Do they invest in your geographical region?
  • Hold periods – Does the investor’s investment hold strategy align with your interests?
  • Management strategy – Does the investor’s management style align with your interests?
  • Strategic opportunity – Does the investor offer more than just cash?
  • The right person – Determine which people at the firm are the most logical investors for your business.

Create a target list

With your target investor profile identified, build a target investor list.

  • Start with firms that have actively pursued you in the past.  Investors that already know you and have expressed interest in your business are the easiest investors to get in front of.
  • Add in firms that you’ve had conversations with in the past, but haven’t actively pursued you.
  • Ask your trusted advisors and fellow-entrepreneurs for recommendations on potential investors that fit your desired transaction type.  Asking contacts who spend a lot of time in the capital space (bankers, lawyers, accountants, etc.) is a great way to find connections.
  • Ask investors you know who you should reach out to.  Investors often share deal flow with upstream and downstream firms and are usually happy to pass along exciting opportunities.
  • Research local investors in your area.  Most major cities have some investor list or directory or google searches can turn up options. (here’s one of Nashville’s investor lists)
  • Research investors that specialize in your industry.  There are so many websites now that track investors who are interested in specific sectors. Google your industry and “investors,” and you’ll probably find one of these lists.

Qualify Investors

Evaluate each firm against your target criteria and classify them into four buckets:

  • Ideal targets:  These are the investors that on paper check all your boxes.
  • Potential targets:  These are investors that check most of your boxes and invest in the type of transaction you want to pursue.  Your ideal investors may not be interested, and in that case, you always want to have a list of acceptable alternatives.
  • Future targets:  These are investors who you are likely too early for.  Occasionally these investors will be willing to invest in an earlier-stage company than they typically do because it’s in a sector they are excited about, and they want a seat at the table for later transactions. It’s also good to get in front of these folks early-on so that when you are the right size, they already know who you are.
  • Not a fit:  Don’t bother doing any more work on these investors.  Delete and move on.

What is the Best Way to Stage a Capital Raise Process?

Here’s how to structure an efficient process:

Step 1: Build Your Target Investor List

Step 2: Reach out to Target Investors and get NDA’s Signed

Step 3: Conduct Qualifying Introductory Meetings with Investors

Step 4: Conduct Early Diligence Meetings

Step 5: Get and Evaluate Term Sheets

Step 6: Select Investor(s) to go Exclusive with

Step 7: Final Diligence / Documentation

Step 8: Closing

Like any sales process, you want to keep the momentum going by setting clear follow-ups and next steps after each interaction.  Each investor has different internal decision-making processes. You need to know where they are at in that process.

Let investors know the key dates, including when you expect to receive term sheets / LOIs and when you plan to close the transaction.  This will keep investors moving and working towards these deadlines vs. dragging their feet.

What Legal Documents Do I Need For a Capital Raise?

At a bare minimum, you will need the following legal documents.

  • A Non Disclosure Agreement (“NDA”): An NDA is a legal document that obligates one or both parties to keep any information shared during the process confidential.
  • A term sheet / Letter of Intent (“LOI”):  Term Sheets and Letters of Intent are non-binding legal documents that outline the key terms of the proposed deal.  Many investors will issue their versions of these, and you’ll be responding/marking up their document.
  • Transaction Docs: This is a package of documents that dictate the legal terms of the deal, including how the business will be managed going forward.  It will include an operating agreement, a purchase agreement, voting agreements, etc.

Resources to Check out For Template Legal Docs

There are a few credible online sources of free template legal docs.  These can be a helpful starting place, but you’ll want to customize the documents to suit your specific needs.

The law firm Cooley has a free resource center that includes downloadable transaction documents. It includes an incorporate package, seed stage financing docs, a non-disclosure document and several others.   Link to Cooley’s transaction documents here.

The National Venture Capital Association of America also has good template legal documents available. Link to NVCA’s transaction documents here.

Always work with legal counsel to draft and negotiate these documents.

Best Practices for Creating a Projection Model

Every business is unique and requires a different projection model; however, there are a few rules that apply to every projection model:

Number 1: The projection model should be a realistic representation of how you believe the business will perform over the next 3-5 years.  Don’t show hockey stick growth because you think that’s what investors want to see.  Show what you will actually be able to do.

Number 2: You should be able to defend every assumption in the model.  Don’t be surprised if you are asked about assumptions during an investor meeting.

Number 3: You should have a detailed revenue build that shows your assumptions for revenue growth, including pricing, # of customers, retention, etc.

Number 4: You should include a detailed headcount buildout (by department at the very least).

Number 5: Use a bottoms-up approach to projecting expenses to make sure you accurately capture all your business expenses.

Number 6: Don’t agonize over trivial assumptions.  Plug in a defensible assumption and move on.

Number 7: Forecast your actual cash needs by creating a full income statement, balance sheet and cash flow statement.  Don’t forget that working capital can have a big impact on your cash needs.

Number 8: When your building a projection model, keep it as simple and easy to follow as possible.  You don’t want to spend a ton of time explaining how to follow the model to investors.

Number 9: Create summary charts that show the high-level financial statements.

Number 10: Add in a cushion.  Things happen, revenue takes longer to come on, you need more people than you think you will. Give yourself some breathing room for the unexpected.

How to Create an Effective Growth-Focused Investor Deck

What is an Investor Deck?

An Investor Deck, also known as “a pitch deck,” “investor presentation,” or “confidential information presentation” (“CIP”), is a written high-level overview of your entire business.  Investor presentations are your most important tool when launching a capital raise process.  They should accurately reflect your business and position it an optimal way to attract investor interest.

An investor presentation should be structured like a story.  Your goal is to capture the interest of investors from the beginning and then lead investors through the merits of your business.  By the end of the story, you want investors to understand why your business is an excellent investment opportunity.

Ground Rules For Creating an Investor Pitch Deck

Rule 1: Highlight your strengths and make sure the key attributes of your business are properly explained. For early-stage companies, this is usually the market opportunity or your differentiation. For later stage companies, it’s your value prop, proof points, customer list, etc.

Rule 2: Keep it simple. Focus on providing the key information required to understand your business. You can always follow-up with more detailed information.

Rule 3: Make sure it’s easy to read.  Make sure your font color, size, and typeface are easy to read. Make sure that your presentation doesn’t get cut off or have weird formatting issues when printed and is easily readable on a mobile device.

Rule 4: Don’t put any secret sauce in your pitch deck.  Despite having NDAs in place, you never know whose hands your pitch deck will fall into.  Always err on the side of caution when including highly sensitive or proprietary information in an investor presentation.

Rule 5: Leverage professional design resources.  Whether you pay a graphic designer to create the final product or use an online template, make sure your investor pitch deck looks professional.

Rule 6: Create your investor presentation in PowerPoint or comparable online alternative.  Don’t send a massive word document business plan.

Rule 7: The investor presentation should be no more than 15-20 slides max.  You can always have detailed information ready to queue up in case you are asked questions about it, but you don’t need to include it in the initial presentation.

What Slides to Include in an Investor Deck

Below are the sections you want to include in your investor deck. The order of these sections depends on your company’s stage and strengths.  Each of the following sections should be no more than 1-2 slides in your deck.

Executive Team Overview

  • Highlight the background and experience of your executive team.
  • Include a picture, name, title, and background for each of the key executives.

Setup

  • The setup page introduces your business and sets the tone for the rest of the presentation.  Within thirty seconds of starting the presentation, this slide should tell an investor exactly what your business does.
  • One to two sentences max.

Problem / Market Dynamics Discussion

  • The problem discussion provides background information on the set of problems your customers experience and the reason your business exists.

Product / Service Offering

  • This is where you explain your product/service offering.  Ideally, this section will naturally flow with the prior section, where it’s easy to see how your offerings solve the problems highlighted in the problem discussion section.

Competitive Differentiation

  • Competitive differentiation is your chance to highlight how your product/service offering is unique and differentiated from the other alternatives in the market.
  • If you operate in a market with only a few competitors, you can do a company by company comparison.  If you operate in a market where many different types of businesses also play, it may be better to show the different types of companies you compete against.

Addressable Market / Market Opportunity

  • The addressable market would be the total potential revenue opportunity for your business if you had 100% market share.

Customer Overview

  • This is an opportunity to provide a snapshot of your current customer base.
  • Include information so investors can understand your customer mix, concentrations, retention, marquee accounts, etc.

Value Proposition / Return on Investment

  • This is where you provide an investor with proof that your product/service is driving value for your customers.

Pipeline Summary

  • This is where you provide a high-level overview of deals that are in various stages of your sales process to demonstrate visibility towards future revenue.

Revenue Model Overview

  • This is where you describe how you generate revenue from customers.  It’s your business model.

Financials

  • This is a high-level summary of your historical and projected financial statements.

Transaction Overview

  • This is where you outline the amount of capital you want to raise, key terms you are seeking, and what that capital will be used for.

Optional Page:  Company Highlights Page

  • A company highlights page can be a great way to highlight the most attractive attributes of your business.  This is a list of the key takeaways you want an investor to go away with.

Potential Appendix Slides

  • Roadmap
  • Full org chart
  • Staffing buildout
  • Detailed financial assumptions
  • Product/service detail page

What Marketing Materials Do I Need?

In order to walk potential investors through your business, you need to put together marketing materials. At a minimum, you want to create the following materials:

  • A pitch deck.  This provides a high-level, but comprehensive view of your organization.  This should be a 15-20 page deck that walks through the key attributes of your business.
  • A projection model.  This should be a reasonably detailed model that depicts what you project the business will look like over the next three to five years.

A one-page summary can also be helpful.  You can send this early on in the process to weed out investors who won’t be a fit for your business and avoid sending a lot of sensitive information.  At a minimum, a one-page summary should include:

  • A quick description of what your company does and your product/service offering.
  • Investment Highlights:  These are concise bullet points that walk through the attractive attributes of your business.
  • Date founded
  • Location
  • Number of employees
  • High-level historical and projected financial profile (revenue and EBITDA at a minimum)
  • Transaction interests
  • Amount of capital you are seeking (if growth capital)
  • Use of proceeds