Startups and small business owners should evaluate potential angel investors just as they are to being vetted in turn. If someone potentially may want to invest in your company you not only do you have a right but a duty to find out as much about them and their investment strategy as you can. Doing so will save you significant time and energy.
Aaron Schwartz, founder and CEO at Modify Industries, Inc., which designs interchangeable custom watches known as Modify Watches was recently on a panel at NextSpace in Berkeley. He shared the stage with the Venture Capitalist Michael Berolzheimer of Bee Partners and Doug Bend, a startup and small business attorney. The panel was about the mechanics of raising that first round of financing, aimed at an audience consisting of mostly early-stage entrepreneurs who wanted to know how much you should raise, what type of story you should tell, and whether you should raise equity or debt?
Schwartz, who has raised over $1.5 million for his own business, recalls Berolzheimer’s list of a set of questions that entrepreneurs should bring into every investor meeting. They are as follows:
When was the last time you made an investment?
Seed stage VCs should be making investments actively. If the investor hasn’t made an investment in the last three months, they might not have money to invest and could be wasting your time. Unfortunately, quite a few VCs take meetings although they lack funds. You can use tools like Mattermark to get some of information on investors’ last investment before the meeting.
What is your typical bite size?
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investors typically invest different amounts; some invest $25,000 to $100,000 and others might not write checks smaller than $250,000. Before wasting your and an investor’s time, research the investor’s typical investment size. You can use Angel List to look at investor’s typical investment sizes.What’s your process like? How do you make a decision?
Investors can have very different investment processes. Some may make a decision after one meeting, and others may take five meetings without making a decision. Ask the investor about their process. If they hem and haw, get out – it’s not worth wasting your time. Getting a “no†is way better than getting no answer. Raising money can be a full-time job for a founder, so learning about an investor’s processes can help you know what to expect.
Who else do you co-invest with?
If an investor has committed, ask who she or he co-invests with. Warm introductions from an investor can be incredibly impactful – she’s putting her money and credibility on the line. The referred investor then knows it must be a worthwhile deal. If the investor has a network of “co-investors†in general, she probably means business.
How does our business fit within their portfolio?
Of all the questions on this list, this is the easiest for you to research ahead of time. You might find that no other businesses in the portfolio are similar to yours – in that case, get ready for a quick meeting. Similarly, if there are a lot of businesses similar to yours, you might run into a conflict. In general, you’re looking for the “just right†portfolio – one with analogous companies that might share a business model, but no (or few) direct competitors.
Also, find out how investors interact with founders after the deals is sealed. Some are more hands-on than other. There are no “right†answers for any of these questions, says Schwartz. It’s important that you know what type of relationship you’re entering. Your investors are going to be your partners for the long-run, he adds, noting that business owners should vet investors to make sure that they fit with that owner’s goals.
A version of this article was originally provided by Bhavin Parikh, CEO and co-founder of Magoosh, which creates web and mobile apps to help students prepare for standardized.