Frequently Asked Questions from Investors

Attracting external investors is a constant struggle for a business owner. After establishing the business through a promising concept and dedicated effort, external investors expect to see financial forecasts, proof of progress, and a well-defined plan for the use of their funds. While these are standard practices for successful businesses, it is beneficial to be familiar with the inquiries investors may raise and their reasons, in order to avoid any unpleasant surprises.

The seven most frequently asked questions are:

1. What makes your business stand out from others?
2. What is your current spending rate and financial stability?
3. What are your goals for the growth of your business?
4. What drives you personally to manage your business?
5. How skilled and experienced is your team?
6. How do you plan to allocate the funds raised?
7. What are the profit margins of your business?

1. What sets you apart from others?

Investors, specifically venture capitalists, usually aim to support successful businesses rather than 'copycat' companies. Therefore, you should expect angel investors to inquire about this aspect. Primarily, it is crucial to have a clear understanding of what sets your business apart, the uniqueness of your idea, and its sustainability. This also entails having a clear understanding of your potential market size and how feasible it is to achieve your goals.

2. What is the pace at which you are using your funds and how long will it last?

One of the main causes of business failure is the depletion of financial resources. This can even happen to profitable businesses if their cash flow is not properly managed. Investors will want to ensure that the business owners are aware of this and have a firm grasp on their expenses. The term 'burn rate' refers to the amount of money a company is spending, either gross (without including revenues) or net (with revenues included). The 'runway' is the length of time a business can sustain its operations with its current cash position, assuming no major changes in income and expenses. This can be easily calculated by dividing the current cash balance by the monthly losses.

Investors will want to ensure that the amount being raised will sustain the business until it becomes profitable, or at least until the next round of funding. However, raising funds can be time-consuming and can divert attention from day-to-day operations. For instance, if a business is seeking £100,000 but is currently spending £50,000 per month, this could pose a problem. The business must have sufficient funds to reach its next milestone, and a general guideline is to have a runway of eighteen months. In the case of a business with strong recurring revenues and low churn rates, investors will primarily focus on the net burn. However, if the revenues are irregular or risky, the gross burn rate becomes more critical, and it is essential to understand which expenses can be reduced in case things do not go as planned.

3. What are your aspirations for the company?

Potential investors are seeking out companies that align with their objectives. Angel investors may have different expectations compared to venture capitalists. While an angel investor may aim to increase their investment of £100,000 to £1m, a venture capitalist is searching for a 'unicorn' (private companies with a worth of $1bn+). Although your goal may be to establish the largest possible business and you may believe that your target market can support this, not all founders share the same ambition. Some may desire to create a legacy for their family, while others may prefer a profit-generating enterprise for personal income. While there may be investors who share these desires, a successful partnership requires alignment between the two parties.

4. What drives you personally to operate your own business?

It is crucial for investors to comprehend your purpose and goals for being involved in the business. It is necessary to demonstrate your enthusiasm for the business and the reasons behind it. This entails proving your complete dedication rather than it being just a secondary venture. Investors are inclined to verify that you have a personal stake in the business, with your own funds at stake. However, they also expect to see that you are adequately compensated. They do not want you to be compelled to give up on the business or experience sleepless nights due to financial instability for yourself or your loved ones.

5. What is the level of expertise and experience of the team that you have assembled?

When it comes to early-stage companies, the team is often viewed as more crucial than the business plan by most investors. As plans rarely go exactly as expected, companies may need to pivot and change direction. The success or failure of a business is ultimately determined by the quality and dedication of its team. It is the responsibility of the founder to ensure that the team is motivated and shares the vision of the company. Additionally, angel investors may inquire about the team's composition and compensation, as it reflects on the business's potential. Attracting experienced and committed individuals who are willing to work for equity rather than a high salary is a positive indication for the business.

6. What will be the utilisation of the funds raised through your fundraising efforts?

Frequently, company owners are not clear about the reasons for which they are seeking financial support. They may provide a rough breakdown, such as 10% for technology and 20% for marketing, but this suggests that they do not fully comprehend the amount they need to raise and for what purpose. It seems that they simply feel like having some extra funds in the business. It is crucial to be more specific about how the funds will be distributed throughout the business. How much is required to achieve the projected results? What is the estimated cost of developing a particular technology? What capabilities will this technology provide? How much is needed for marketing to launch a new product? Each step should have a well-defined understanding of the expenses. It is acceptable to have a contingency plan, but investors are not interested in funding an undefined 'strong balance sheet' or a war-chest for potential M&A opportunities.

7. What is the percentage of profit margin in your business?

Angel investors will likely inquire about your business's scalability, making it essential to demonstrate how this can be achieved. A crucial factor in determining this is the gross margins, as they indicate the profitability of the business at scale. Due to the high fixed costs in the early stages, investors will be interested in how these costs will improve as the business grows, focusing on the unit economics. Specifically, they will examine the contribution margin, which encompasses expenses such as marketing, sales, and customer service, to understand which are fixed and which fluctuate with business growth. Additionally, investors will want to understand the working capital requirements and cash flow schedule, as these factors impact the speed and funding needed for business expansion.

Undoubtedly, this perspective only considers a single aspect. When you bring in external funding, you are giving up a portion of your independence and it is crucial to guarantee that you can collaborate efficiently with your investment associate. Eventually, issues may arise and it will be necessary to have unpleasant conversations with them. Having a positive working relationship, shared objectives and effective communication can be beneficial in such situations. The ideal partnership should be mutually supportive and dedicated to establishing a robust and durable business for the future.