9 Key Questions to Ask Any Investor Before You Seek Funding for Your Business
By guest contributor Jack Harwell, adviser at the Kansas Small Business Development Center at Johnson County Community College
Unless you have lots of cash stashed away, you’ll likely need to seek funding to start or grow your small business. And funding for small businesses typically comes from four sources:
1. Friends and family
2. Banks or other lending institutions
4. Equity investors (angel investors, venture capital)
We’ll be upfront: Most small businesses will seek the first three types of funding. But if you think you’ll seek equity investments, here are some considerations to weigh and some questions you should ask investors before you dive in. Although selling equity (equity is the difference between a company’s total assets and liabilities) might not be for everyone, there are times where it is a good option to trade a piece of your ownership to scale quickly.
> > > > Still curious about your funding options? Looking for some guidance? Give us a call at 816-235-6500, and we’ll outline your next steps (for free) that’ll help put your funding goals in perspective and connect you with resources that have advisers who can help you evaluate your options and classes to help you start or grow your business.
Still with us? Good. Here are a few key considerations: How much do you want others to be involved in (or have control of) your business, and how much do you want to pay for the cash injection? The annual interest rate for banks as of early 2019 is around 6 percent. Other, more non-traditional lenders charge higher rates — some 20 percent or more. Compare this with the average angel investor, who wants the investment to grow three to five times within five years; that’s about a 25-40 percent annual interest rate.
Do you know where that cash will come from?
On the other hand, if you’re a founder, a funding strategy focused on investors might be the best way to get the cash you need to grow your business right now because some early-stage companies don’t have the track record that would make them a good match for a traditional lender. Another advantage of investor funding is that the individual might be a future source of cash injections as the business grows.
But sometimes, even when an investor seems ideal, things fall through. Don’t get discouraged. The timing just might not be right, or the investor might not be a great match after all. And you should always listen to investors’ feedback and learn as much as you can.
A good rule of thumb is to make sure the investor you’re speaking with is the decision-maker. If not, find out who is. You don’t want to waste time asking the wrong person.
Stay connected to KC entrepreneurship
Get entrepreneurial insights, inspiration and events delivered right to your inbox.
So if you’re set on seeking investments, arm yourself with these key questions you can ask any potential investor before you go down that path:
1. What are your thoughts about my pitch?
Start with this open-ended question to get an early read on the level of interest.
2. What industry sectors or geographical areas do you invest in?
The prospective investor might be ideal if he or she is active in your industry and region. But keep your spirits up if they don’t invest in your business. Remember that investors are investing their money (and often their insight) and like to do that in industries they know.
3. What is the typical size of investments you make?
You want to make sure your company isn’t too small or too large for that investor.
4. In which companies are you currently invested?
Would you be their sole investment, or do they have multiple investments? If they are invested in other companies, see if you can learn about those companies and their experience with the investor. Ask if they are comfortable with you speaking to the other company leaders. It might be a red flag if they won’t disclose the other companies.
5. What are your standard terms?
Most experienced investors have terms they are comfortable with. It’s always best in any negotiation to learn more about the other party’s position before revealing yours. This is especially true if you are new to the environment. It is always a good idea to consult an attorney experienced in early-stage equity transactions to ensure you know what you’re getting into.
6. How long does a typical deal take to finalize?
This will help you plan when the money might be available.
7. Will you be personally involved in the business?
Different investors have different levels of interest in the operations of their investments. As a founder, this is something you should carefully consider. After all, you probably started your own business to have more control. Some investors may want some of that control because they might have a different vision or see a different path to growth. On the other hand, you may benefit from the experience and connections that the prospective investor may bring to the table. Either way, it’s critical to come to an understanding on how and how much they will be involved.
8. Are you investing your own money, or are you representing an investment fund?
It’s good to know where the money is coming from. It’s also important to know if others would have an indirect stake in your business.
9. What value can you add to my business, beyond the cash injection?
As mentioned earlier, the business might benefit from the investors’ experience and/or connections. This is another opportunity to learn how the investor might want to be involved in the business and to discuss synergies that could further the success of your business.
Looking to start or grow you business? Check out the plethora of courses from the Kansas Small Business Development Center at Johnson County Community College, which also has expert advisers who can outline your options.
See how Kansas City is becoming America's most entrepreneurial city through KCSourceLink's entrepreneurship ecosystem reports at wecreatekc.com