What every angel should ask before investing (2)

September 19, 2016

Here’s the follow up on our blog regarding what angel investors should ask startups before investing. In our previous blog we covered the following categories: an overview of the business, the market opportunity, the team, the product and / or service as well as competition.
 
We suggested that these questions be covered over a series of meetings. It will give you time to digest the information shared and allow you to distil the fact from the flash. In this blog we cover an additional seven categories of questions that can be asked in follow up meetings.

 Marketing and Customer Acquisition
These questions will go a long way to helping you understand how your money will be spent. The cost of client acquisition should always be less than the customer life time value.

  • How does the company market or plan to market its products or services?

  • What is the cost of a customer acquisition?

  • What is the projected lifetime value of a customer?

  • What is the typical sales cycle between initial customer contact and closing of a sale?

 
Progress in the Business
Matching up a startup with your investment preference should also involve the business stage. Investments could take place anywhere along the following spectrum:

Idea stage – Prototype – Complete Product – Signed Up Users – Paying Users – Profitable

The earlier you invest the cheaper the capital, but the greater the risk and challenges. Proof of concept through early traction is not always necessary but provides an indication of where the solution could go.
 
Disciplined investors will stick the business stage they are comfortable with.

  • Describe the business’ development to date?

  • What early traction has the company gotten (sales, traffic to the company’s website, app downloads, etc., as relevant).

  • How can the early traction be accelerated?

  • What has been the principal reasons for the early traction?

 
Risks
You’re not always going to get a complete answer to these questions, so important you consider them in conjunction with the rest of your due diligence process. Understanding the risks will help you develop strategies to mitigate them.

  • What do you see as the principal risks to the business?

  • What legal risks do you have?

  • Do you have any regulatory risks?

  • Are there any product liability risks?

 
Intellectual Property
IP can be a significant differentiator. A strong value proposition, as a result of IP, is often key to success in scalable solutions.

  • What is the company’s secret sauce that differentiates you from the competition?

  • What key intellectual property does the company have (patents, patents pending, copyrights, trade secrets, trademarks, domain names)?

  • What comfort do you have that the company’s intellectual property does not violate the rights of a third party?

  • How was the company’s intellectual property developed?

  • Would any prior employers of a team member have a potential claim to the company’s intellectual property?

  • Will there be any claims by a party claiming to be a co-founder? (Note that this issue arose with Facebook and other companies.)

 
Financials
Financials are a cornerstone of any due diligence. Early stage companies may not have any track record to point to, but it’s important for the financials to tell a coherent story. The numbers will tell you the company’s current financial situation and proposed future burn rate.

  • What are the company’s three-year projections?

  • What are the key assumptions underlying your projections?

  • How much equity and debt has the company raised; what is the capitalization structure?

  • What future equity or debt financing will be necessary?

  • How much of a stock option pool is being set aside for employees?

  • How much burn will occur until the company gets to profitability?

  • What are the key metrics that the management team focuses on?

 
Financing Round
In closing, angel investors should get a full understanding of the funding round. An investor or investment syndicate can often take up a full round of funding, but this is not always the case.

  • How much is being raised in this round?

  • What is the company’s desired pre-money valuation?

  • What is the planned use of proceeds from this round?

  • What milestones will this round of financing help you achieve? What runway will this round of funding provide?

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