By Daniela Baker
Many entrepreneurs wonder if they may vet investors just as they are to be evaluated in turn. The answer is yes! These are people who may be investing in your company so 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.
The best strategy is to ask the following six questions before you reveal the details of your business concept. If any investor is hesitant to answer, move on to the next.
Have they invested in other companies over the past 6 months, year, two years? Before revealing too much about your business concept you want to first determine whether this person is a genuine angel investor. A serious angel will have invested in at least one company over the time period noted above. If the angel has not made many (or any) investments during any one of these periods, ask for a realistic assessment of your chances to obtain funding. If you receive a vague response, such as “I’m currently reviewing several proposals” it may be that this person is not a genuine investor but only seeking to hear about new ideas. A common method for an investor to get out of a deal after they have obtained all the information about your concept is to attach unacceptable terms, such as significant input into business operations or unrealistic expectations of performance.
What are their specific criteria for investing in company? This question is one of the first you should ask. You want to know at what stage of the business they fund (i.e. concept, beta, product launch, first customer contract). If your needs don’t mesh with their funding strategy you can cross this investor off your list early in the process.
Do you have to pay them to present your pitch? In a survey conducted by the Angel Capital Association (ACA) in 2008, 62.2 percent of angle investors reported they do not charge fees to listen to presentations. Of the remaining 37.8 percent who do charge fees, the average amount was $580. For full details regarding presentation fees visit here.
How involved do they wish to be in the business? This runs the gamut from completely passive (“call me when you sell”) to active participation in day-to-day operations–complete with desk and phone—to everything in between. There is no right or wrong answer here just ensure that you are comfortable with the level of involvement (or noninvolvement) the investor desires to have.
Will they fund additional rounds, if needed? Most angels are focused on the short-term and seek to exit within 5 years or less. As a result, they don’t anticipate funding beyond the first round. However, many times additional funding is needed down the line and, while you can apply for a credit card to obtain needed funding, it pays to also explore just how deep each investor’s pocket is.
What is their exit strategy? As noted, most angel investors seek to exit within 5, perhaps 6 years. There are also investors who subscribe to the “early exit” model and seek to be out of the business with two or three.. The other end of the range has investors staying in for at least 10 years (these are the investors who may be willing to fund additional rounds). Again, no right or wrong answers here but just make sure that you and your investor are in agreement regarding exit strategy. Good luck!
Daniela Baker is a small business blogger at the credit card review website, CreditDonkey.com.