Whether you have an angel investor swooping in early to give you your first shot, or a VC who has recognized your years of work and has decided to help you continue your journey into the big leagues, it's always exciting to finally see some funding for your hard work.
However, the questions don't end once you suddenly find yourself with an offer for $20 million dollars to keep your business going.
Before you sign the contract, you'll need to get a few issues cleared up to make sure you're working with a decent, hardworking venture capitalist who has your best interest in mind, and not a VC who will remove all your creative energy as well as most of your revenue stream. You also want to make sure all expectations are on the table, to avoid future disappointments (from either party).
Here are some important questions to ask your potential investors:
How do you make a decision in who to invest in?
Knowing the reason why investors decide to invest in certain projects but not others can tell you a lot about the investor, and what they prioritize in a company. Whether they're swayed more by a strong team, sharp business instincts, or a bankable idea could give you a lot of information about what your company can expect.
How do you judge your success as an investor?
This answer could be a run-of-the-mill, "I invested in x company and got an x return on investment", or it could really surprise you. What an investor views as personal success really helps to set a tone for their future hopes for you. For example, if their personal success was a working relationship with a one-in-a-million, genius serial entrepreneur, then it speaks to a priority to foster long-ranging partnerships.
What are your expectations for the company and the startup CEO?
Getting straight to the point could yield effective answers. As an entrepreneur, it's always helpful to know if your vision aligns with the vision of your investor. The last thing you need is to later bump heads over a problem that is fundamental to the future of your company.
Have you ever removed a CEO from a company before, and why?
Removing a CEO from their company is not a common practice, but it happens. When entering a partnership with a VC, you want to know whether or not they intend on keeping you around, or if they want to invest a large share of your profit, but then wait for a time to bring in a 'grown-up' to take over. A good way to gauge an investor's attitude towards a new founder is by looking at his track record. Asking why a VC would consider removing a founder is also key to understand what he values in a CEO.
How involved are you with founders after investing
In a way, a VC firm who is going to invest in your company is going to be a kind of acting partner in your business. Each partnership is different, however. Most VCs will not interfere with day-to-day operations; some demand an hour a week of your time, while other investors have you communicate through an assistant, if at all. To find out if your investor can offer you the kind of support you're looking for, just ask.
What is the most compelling aspect of the company we're launching?
To really help get to an idea of how your investor sees your company is to find out if the investor truly understands the magic of your idea, or really believes in your team dynamic, or sees you as an entrepreneur with truly great potential. The answer to this question may expose hidden strengths, or it might be directly in line with how you see the company.
What has been your most disappointing venture and why?
Much like finding out how the investor views success, it's equally important to find out how they view disappointment - so you can avoid it.
When do you expect a return on your investment?
Settle expectations when projected return on investment as early as possible, so that you avoid later misunderstandings.
How much return have your entrepreneurs received from exits in your previous investments?
This question is important for two reasons: you will want to know how much equity the investors have kept, and whether or not they have a successful track record.
How much do you trust our judgment and business acumen?
This answer will tell you everything about how much involvement the investor feels she needs to put in, what the odds are of being replaced, and how much space they'll give you to figure out your next decisions.