This post first appeared here as an article on Proseed Magazine in 2013. I have updated it since then, so this version is the best to read.
Who is the article for?
I send this article to people who approach me asking for feedback, advice, mentoring and/or an investment.
I send a link to it when someone writes to me, saying "you ought to meet". or "can you help" 'x' who has a great business idea", with the suggestion that they forward it to the person they want me to help.
If you are 'x', and you don't see why you should read on, feel free to stop now. Please do let the person who introduced us know that it was your decision not mine, so they don't think that I am being unhelpful.
I share this article with people who are over-exposed to the BS culture of "fake it til you make it" startups, and who have sadly been influenced by those who think that investors are stupid and it is smart to take advantage of them.
I changed the blog post title from "Questions from a potential investor" to "Questions from a potential investor, mentor or partner" because sometimes people approach me who do not want an investment. I may be able to help them anyway, and if I can, am usually glad to.
Why do I request "pre-information"?
I feel that if I am ready to give away my time, asking those who approach me to invest the time to pre-brief me is a good filter and fair. It shows they take me seriously. While I enjoy hearing about business ideas, I prefer to know the stage people are at before meeting. I want the person to be properly prepared and to have done the "easy stuff" before we meet. People often want to chat before they have done basic Google searches on their potential competition, or figured out their planned business model. There is nothing wrong with this, but in this case I don't want to set up a dedicated meeting or call. I don't want to spend 30 minutes of a one hour meeting finding out information that I could pick up in 5 minutes reading a briefing document. If the idea is good then the extra time during the meeting will be much better used doing things other than finding out simple facts about the team and ownership.
I am usually willing to give up to an hour of mentoring/feedback to people with business ideas - at a time/place convenient to me - provided I am not involved in anything competitive. This is not a promise. Sometimes people annoy me so much with their approach that I decide not to meet them at all. Sometimes I encourage people to attend events I am going to be at anyway, so that we get a few minutes to chat. Often five minutes is enough for me to tell whether I can be of any use. The questions I ask are ones that all professional investors will ask so it is not a waste of time to answer my questions.
I do not promise to find time for a call, meet, get involved in giving feedback about why I don't want to meet after I get the information requested in this post.
The questions and answers you provide are to help me decide if I want to do that. I don't want to focus time and energy on projects that are not going to happen. Obviously if things have changed "Hi Richard - 6 months ago you asked us whether we had working product, a team and at least 5 potential committed clients. Back then we didn't - and you were right to send us away. The good news is we've done all of that and more" then I'll be glad to take another look.
Because the situations of people approaching me vary so much please be aware of the fact that some of what I suggest below may not fit your situation. If this is the case, just skip or move on to questions that are relevant to you.
Clients and potential clients People often ask me what I think about their idea. I always tell them 'it doesn't matter what I think nearly as much as what clients and potential clients think', and and I ask them what they have done to get this information from clients and potential clients. If I am told "we have interviewed 10 directors of companies who we want to sell to and they all say that they are very interested in purchasing at the kind of prices we want to charge" it not only is impressive it also tells me that the person I am talking to is well organised and has the self-confidence to get out there and talk to people.
Why? What's the big idea? The vision. Why are you doing it? What and whose problems are you aiming to solve, what pain points are you addressing. What is it that makes a) your users b) people who will send you money really appreciate what you do or plan to do.
Long term value of clients/repeat revenue. This can be hard to estimate for a startup, but you have to do it. If you sell post cards to tourists, the chances of repeat business are almost zero. If you sell premium (expensive) dog food to wealthy people who you can persuade that your dog food is the one their dog prefers, the repeat revenue may be very high. If you sell post cards to shops that sell them to tourists, you have a good chance of repeat revenue if they find your cards easy to sell and make a good margin on them. If you sell jet engines to Airbus, and each one comes with a high price service contract, it is obvious there will be repeat revenue.
How are you doing? How are you making/going to make money? If your business is already underway please describe how you got to where you are now, what the key processes are (how you get clients, deliver your product or service and make money), and what you expect from me. Please send me basic facts, your trading history: costs, revenues and profits, number of employees, and ownership. A simple spreadsheet showing past and planned future costs is often very useful. There is a useful concept of Unit Economics, which is very simply. what are the costs of making/doing the thing you sell, and how much do you charge for it. If you are a real estate agent, and the cost of visiting, documenting, describing, promoting, explaining methods for making profit from the property and showing potential clients a property, and handling paperwork if there is sale is US$400 and you make $2000 if there is a transaction, you are making $1600 per deal, it becomes obvious how many sales you need to make to cover your fixed costs and start making money. If you are losing money, don't expect an investor to bail you out, unless some dramatic change is about to happen that you can explain.
If you have not started yet, describe your planned business model, how you are going to make money and how far you have got already. If you haven't thought about how you are going to organise your business so that your costs are much less than your revenues, please do so before we meet. If you are at the stage of "once we have traffic we should be able to make money" I am not that interested unless you explain how. You above all people should be thinking, brainstorming and testing ideas in this area.
Costs A tough area for many entrepreneurs is the issue of 'founder salaries'. It is important to address this. If you have been working for free in your spare time and 'post investment' are planning to go full time then you may not know how much to suggest. A rule of thumb is that until you are making a profit, approximately 50% of what you were making on a salary might be reasonable unless you have rare and highly valued skills and experience. Investors won't like the idea of you being too comfortable on the back of your take home pay from your startup. Results related bonuses, and salaries that rise as the company goes through agreed milestones make a lot of sense. 2021 update - I've recently heard this approach may be wrong. Maybe start ups should pay more, not less, than normal.
Competition - who are you competing against in your home market and internationally? Who is dangerous to you now and how are or can you be better than them? If you haven't searched and checked who is doing this in foreign countries, do it now. Don't show up to a meeting before you have tried to buy what you are thinking of selling on mfg.com, Ebay.com, Amazon.com and via a simple google searches. You may think you are the first person to have thought of renting out dogs You are wrong. Years ago I posted this Now Will Bunker who made his fortune in a dating site has invested in Borrow My Doggy which charges both the dog owner and borrower for the transaction and unsurprisingly is making money. A great example of it being more important to execute on an idea than be the one who has the idea first.
Strategic plan. How will you grow in terms of geographical spread and product/service offerings.
Benefits for investors. How am I, and other investors, going to make money?
End game. Are you going to exit? If so how, when, who are your potential buyers ?
Ownership/shareholders/Team: key team members etc. who apart from you is part of your set up?
Gaps what do you lack/what are your weaknesses/challenges? What else do you need that you don't have today, and what are you doing to address them? As Gary Vaynerchuk says, self-awareness is a vital business skill.
Barriers to entry if you start turning into a high profit business. what is to stop others entering the market?
Dangers and threats. how could it "all go wrong"?
My role. How can I help you ? What is the main reason you approached me?