Startup founders naturally love to answer questions about the vision that they have and the opportunity that they offer. In a similar way, as an investor, you want to ask questions. The problem in this case is what questions are to be asked. You will notice that the startup founders will try to minimize or deflect questions but you want to be persistent, calm and patient in order to be 100% sure that you will receive the accurate answers. Out of the different questions you will want to ask, the following ones are the most important.
What Is The Burn Rate?
You are interested in learning about burn rate and runway since you want to know how fast the money will be spent, together with for how long a company can survive before it needs new investments. Burn rates that are over $50,000 monthly and runways lower than 6 months normally indicate desperate and inefficient startups. Always think twice before you invest in this case.
How Is The Startup’s Capitalization Table?
Share allocation among startup founders is really important, together with outside investment numbers and sizes. That is going to tell you a lot about stability, management and health. Startup funders do love to discuss equity but money is a very strong commitment that has to be connected to a capitalization table.
When Did The Startup Plan Start?
In the event that a startup has been on the market for over 2 years and there is no revenue flow or product, there is some sort of explanation that has to exist. In such a situation another investor is not going to help. Long roads are indicated by founder turnover and history gaps.
Can I Talk With Board Members Or Outside Advisors?
A startup needs to have outside advisors. These individuals should not be family members or major investors. You want to discuss with them in order to see how the startup is going. Such individuals need to have complementary skills to what the founders will offer. If the advisors and board members have strong connections or a high industry expertise, we have signs that the startup may do pretty good in the future.
Can I Find A Customer That Offers A Testimonial?
You should never end up being sidetracked by the customers that are just potential and that are going through free trials. The same thing goes for founder friends. In the event that it is too early for the customers, you want to learn all that you can about the product or the service that is to be launched, together with promotion plan and rollout. Ask about the number of times that the plans changed in the past.
When Can A Payback Be Expected?
Statistics show that 90% of all startups fail. Because of this, the serious investor needs to find a return on the investment of around 10X. This should happen in the first 5 years. Take a look at the similar companies that were launched in the past and look at the revenues that were generated. Think about employee stock option value together with vesting time.