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.