Investors are choosy where they put their money and an entrepreneur needs to be just as careful who they allow to invest in their company. You will likely be working with your investors for many years, so study the potential investor as deeply as you do the terms of the investment. Asking potential investors the right questions, before they invest in your company, will pay off with higher returns in the future.
These are the six most important questions to determine if the investor is the right fit and can add value to your business.
1. Is the investor well connected? The business case for a well-connected investor is compelling. Investors with extensive networks can help both of you get a positive return from the investment. A study from the Sloan School of Management found it is not only the number of contacts that a person has but also the closeness of those contacts that will result in increase in revenue and completed projects for a business.
Your business will benefit from an investor willing to share their network and bring on other investors to your company.
2. Is the investor working on projects related to the business? It is important to know the other projects your potential investor is working on, advises Jayson Demers, CEO and founder of AudienceBloom. The relevance of the potential investor’s current projects is a vital element in establishing a more stable working relationship between the founder and investor.
If possible, choose an investor whose projects are related to your business. That will help you to build a stronger and lasting partnership that increases the value and stability of your company.
3. Does the investor understand your business? According to Mohr Davidow Ventures, entrepreneurs are better off with an investor who understands the business model and has experience in the industry. Pay attention to how much information the investor requires about the business model to understand it. Check out the investor's area of focus and current portfolio to assess how knowledgeable is he or she about your business and industry.
4. What does the investor expect dealing with your company? Experienced investors do not offer funds to a budding company before researching how the company works, reviewing and analyzing financial performance and evaluating references. You must do research as well. Ask your potential investors what they expect and what they plan to do to increase the value of your company.
Bring up questions related to expectations so both parties will know if their future plans and projects match. Being on the same page will aid both parties to achieve their desired outcome with the investment.
5. Is this an active investor? Some venture capitalists are known to take investment meetings even when they lack funds. Michael Berolzheimer of Bee Partners advises entrepreneurs to work with an investor who has made an investment within the last three months.
There is a good chance an investor who has not invested in any business within that period does not have enough funds to invest in your business.
6. What are the factors and criteria for the investment? Learn what factors and criteria the investor considers before making an investment, advises Grow VC Group. That will guide you to determining which stage of your business the investor is willing to fund.
The investor might be interested in funding are product launches, concept or first customer contract, as examples. Choose the investor or investment group only if the presented funding strategy matches yours. If your needs don’t match, move on to another investor.
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