8 Questions That Will Help Set the Right Expectations With Investors

One of the big questions that every entrepreneur
struggles with is how much funding they should request
from investors in the first round. They know from
forums such as Shark Tank on TV that asking for either
too much or too little will derail credibility in the eyes of
the investor, and leave the entrepreneur with no money
and a struggling startup.
Strategies that I do not recommend include opening the
discussion with a big number, hoping to make a more
reasonable value feel like a good deal, or starting with a
tiny number, hoping to entice interest from everyone.
Both of these will brand you as an amateur to avoid,
rather than a savvy business person with an exciting
new opportunity.
Related: Choose an Investor Like You Would a Spouse
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The right answer is to ask for an amount that is just
right , based on your real needs, and consistent with the
capabilities and interests of the investors you are
addressing. Here are eight key questions that will you
get in the right ballpark with the right investors:
1. Who is your investor audience?
Every type of investor has comfortable ranges and
limits. Angels usually won’t consider requests above $1
million. On the other hand, venture capital organizations
typically look for needs that exceed $2 million. If you are
talking to your rich uncle, do your homework to find his
limits before you meet.
2. What business milestones have you
met?
If you have a good idea, but haven’t started yet, only
friends, family and fools will likely be interested. Angel
investors will perk up if you have a prototype or a few
real customers, while venture capitalists will likely
choose to wait until you have achieved several million in
revenue or customer count.
3. How much do you really need for the
next 12 to 18 months?
Here is where projections of cost, pricing, volumes and
cash flow are critical. If your financial model projects a
negative cash flow in this period of $400,000, you should
buffer this amount by 25 percent, and ask for $500,000.
Be prepared to explain your business model.
4. Can you justify your use of funds to this
investor?
Professional investors expect to see your top three use
of funds categories, and how these relate to scaling the
business, rather than initial development. Ancillary
objectives, like retiring existing debt, buying a building or
paying salaries to people with equity ownership will not
get traction.
Related: What Drove 2014's Eye-Popping $44.7 Billion
in VC Fundraising
5. How much equity ownership are you
willing to offer?
This is all about setting a credible current value on your
startup -- not future value. If you ask for more money
than your company is now worth, no investor will bite.
The average valuation for angel investments is $2
million, which will get you $500,000 for 20 percent of
your startup.
6. Are you flexible on the terms of the
investment?
Most professional investors will expect preferred stock, a
board seat, rights to later rounds and perhaps anti-
dilution protection. If you refuse to offer these, or balk at
negotiating even more restrictive terms, the amount of a
viable investment will be compromised.
7. Are you willing to offer milestones for
staged investment delivery?
Many investors like to reduce their risk by delivering
their investment in stages or tranches , based on your
successful achievement of specific milestones during
the period covered. However, this reduces your ability to
plan or pivot quickly based on unforeseen events.
8. Can you project a compelling rate of
investor return?
Equity investors typically look for 10 times return
projections, since they expect many of their investments
to fail totally. The best way to show return on
investment is to declare an exit strategy, such as being
acquired or going public in the next five years, which
allows the investor to cash out.
In fact, the most successful entrepreneur strategy is to
bootstrap or fund your own startup, such that you don’t
need to expect or require any external investor
involvement. Despite all the hype you hear on attracting
investors, more than 90 percent of startups are still self-
funded, and avoid the hassle of dealing with partners
and giving up a portion of the company.
The best and happiest entrepreneurs build a successful
startup that attracts investors, rather than waiting for an
investor to kick-start their success.