MARKETING

The Questions a Savvy Angel Investor Is Likely to Ask

When launching a new product or service, a savvy entrepreneur will always be able to predict how their target market will react. You’d have insight into their lives, run experiments to gauge a reaction to the proposition, and gradually ramp up a product roll-out while gauging customers’ behaviour and questions. Progressively making the offer better and better based on their feedback. Similarly, when raising investment, you need to get into your potential investor's head. This means anticipating questions and testing responses. In some ways, it is harder, since you have fewer opportunities to meet with investors, and you often only have one opportunity to make the best impression. When an investment raise fails to gain momentum with an individual investor, it quickly becomes stale and less likely to motivate them over time. We've discussed what makes a good investment proposal, how to value a business, what a good marketing plan looks like, and how to construct a financial projection.

However, it doesn’t matter how proficient your materials are, investors are sure to have some questions. Here are a few common questions to prepare for:

On people

  1. What skills, expertise, experience, and ambition does the team have that are relevant to growing the business? Investing in a business that turns into a ‘lifestyle business’ - one with just enough growth to pay a salary to the founders, but not enough growth to deliver any dividends or exits to the investors - is a major concern for investors. The investor will want to know that the necessary ingredients are in place for a business to grow.
  2. What are your/your team's weaknesses, and how are you going about filling them? We all have weaknesses. An entrepreneur who isn't self-aware enough to recognise their own will raise a huge red flag to investors. A plan must be devised to compensate for weaknesses, not necessarily immediately, but some time before they become critical.
  3. How can I help? It is unlikely that every investor will be willing to help, but you should know enough about your target to have considered whether there is anything else, other than cash, that you would value.

On the market

  1. Who are the real competitors in this market? There are no investors who buy into those cliched matrix diagrams with a list of competitors and a list of benefits - where every benefit is marked with a big tick under your product and lots of blanks under the competition. Even a product creating a whole new category has competitors, as every consumer could choose to part ways with their time and money elsewhere. Critically analyze your strengths and weaknesses and those of your competitors, both close to you and beyond.
  2. Which competitor do you envy the most? Some investors may ask a little more creatively about the competition, encouraging you to describe the positives of your competitors' offers. Be prepared.

On investment

  1. What will you do with the funding? It should come as no surprise that an investor is interested in how you will spend their money. A detailed 12-month capital spending projection should be provided, since this is one area in which the business is in control. In general, they will be wary of a high percentage spent on salaries, particularly for founders. Investments in new IP and working capital to finance expansion will be well received.
  2. What is your 'runway' to the next round of investment and what can you prove before the next round? A cashflow projection will indicate when the next round of investment is needed. An investor will be interested in what can be proven before the next funding round is launched and what increases in valuation are likely. You should keep in mind that it takes at least three months between starting a round of investment and getting the cash in the bank. As a result, if the cash is needed in 12 months' time, there will only be 9 months to create the proof points. Maybe you won't launch your product until six months later. What can you accomplish in the remaining three months? You might need to think outside the box here. 
  3. How do you justify your valuation? There are several factors to consider. The more objective the rationale, and the more benchmarks that can be used, the better. When things get sticky, it's useful to turn the question back to the investor and ask them how they would value the business?
  4. What are the risks? Investors are likely to search for reasons not to invest and stress test them. By identifying the risks and explaining the mitigation measures being taken, you can assist them and yourself.