I’ve been angel investing for about a year now, and I’ve made a total of 10 investments (2 in the last month). I don’t think I’ll keep up that pace, but it’s been a lot of fun.
One of the things I need to get better at is having a systematized approach to the first meetings with entrepreneurs. I’m not always going into the meetings as prepared as I should be and that’s a waste of everyone’s time. I also find myself making snap judgements, which I think is pretty common for investors (who I believe decide “yes” or “no” really quickly, and then just drag it out to cover their asses one way or another), but I want to be more rigorous in my decision-making process. I want to be aware of the biases that I have and at least question them freely in my own mind before jumping to conclusions. Biases (or what some might call “pattern matching”) can be useful, and after speaking with lots of entrepreneurs you definitely develop a form of radar for certain things, but that’s not enough for deciding to invest or not.
So I started writing down all the questions I like to ask entrepreneurs when I first meet with them. Meetings with entrepreneurs should never be robotic or survey-like, but I do want to make sure that I cover the things that matter to me. In the middle of a conversation with an entrepreneur, if I don’t have a more systematic approach, I’m going to get sidetracked.
Side note: Writing this post was partially inspired by Kirill Sheynkman, Managing Director at RTP Ventures. He recently wrote, Be a deckless wonder, where he says that he’ll no longer sit through pitch decks in initial meetings with entrepreneurs. I like where he’s coming from–using a pitch deck in your first meeting with an investor is a recipe for looking like everyone else.
OK, so here are (at least some of) the questions that I like to ask up-front when meeting an entrepreneur:
- Why are you doing this? What motivates you? I have to understand why entrepreneurs care about what they’re doing, because it feels like a lot of people are out there starting companies for the wrong reasons or with no real reason in mind. I’ve gotta believe that they’re committed and in it for the long, painful haul.
- How have you validated that there’s a need for what you’re doing? I believe in the Lean process, and want to understand if entrepreneurs are applying it in some capacity. Have they even spoken to a user / customer / potential customer yet? Are entrepreneurs selling vision alone (big vision is important!) or are they selling big vision + a structured plan for trying to get there?
- What keeps you up at night? I’ve gotta understand what entrepreneurs are scared about, and most importantly what they’re top priorities are right now. Are they focused on the right things or meandering around? Whenever I ask this question, entrepreneurs laugh. A few days ago, the response was, “Everything.” I know what it’s like to be a founder. I know how hard it is, so part of asking this is to break the ice and have a really human conversation about the challenges.
- What are the next steps? No plan survives first contact with the market, but entrepreneurs need a plan just the same. I like to focus on the immediate next steps (say the next 3-6 months after financing), to understand how an entrepreneur is prioritizing tasks and challenges. “Running like crazy,” isn’t the right answer (even if that’s partially the reality of what happens once you raise capital). I’m looking for a well-thought out, somewhat reasonable/logical strategy.
- Who are you hiring next? In most cases, because I’m investing early, people are looking to hire technical talent. But occasionally people have told me they’re going to immediately hire in marketing or sales (which is usually a red flag in an early-stage business). I’m also curious about how many people they’re looking to hire, which gives me an idea of whether or not they understand how to budget properly (since humans are always the biggest cost).
- Where do you see the biggest risks? This is similar to the question about what keeps them up at night; I’m trying to get a sense of how much the entrepreneurs understand their businesses and markets. I’m also looking to understand how entrepreneurs think about tackling big problems. The follow up question is simple: What are you doing to address the biggest risk?
- Who is the competition? I haven’t narrowed my focus down to invest in particular areas, which means I hear a broad range of pitches. I might not know the markets well initially. But the entrepreneurs need to, and I want to hear about the competition, and learn from the entrepreneurs. I get very nervous when an entrepreneur dismisses the competition, but at the same time, I’m already assuming there’s a ton and that won’t stop me from investing. Entrepreneurs shouldn’t be concerned about discussing competition–but they do need to prove (at least verbally!) that they’ve found a differentiator that matters. I’m always looking for an unfair advantage or at minimum, the possibility of an unfair advantage. That’s definitely worth digging in on.
- What’s traction look like? Assuming they’ve got a product in the market, I ask about traction. I know traction will be minimal, since I’m investing very early, but it’s still important to ask. Given my interest in analytics, I like to understand what entrepreneurs are focused on when it comes to traction. Do they even understand what it means? Do they understand the key metrics that really matter?
Side note: I find decks are very useful for digging in on traction. Most entrepreneurs will share some numbers in their decks — # of signups, # of users, etc. and very often these are vanity metrics. They open up the door to real questions on traction, which allows me to dig in very quickly.
- Why are you raising X dollars? I’m always interested in why entrepreneurs are raising the amounts they’re raising. I’ve shared my opinion on this in the past (e.g. The $250,000 Funding Trap), but I like to hear the logic from entrepreneurs. I still find that most entrepreneurs don’t leave themselves enough runway; they’re raising for ~12 months, which in reality, once they start spending money, is probably closer to 9-10 months. That’s scary for me as an early investor, who might be asked to pony up again pretty quickly, without seeing enough progress.
- How can I help? I don’t invest huge dollars (although to me it’s pretty damn significant!), which means I’ve gotta provide value beyond the capital. I also want to provide value beyond the money, so I ask entrepreneurs how they think I can help. Entrepreneurs should do research on investors before speaking with them, so they have an answer to this type of question. It also helps prepare entrepreneurs for what individual investors are interested in (specific verticals, etc.) Don’t go into a pitch / investor meeting blind, you won’t succeed.
What about the team?
Most of my investments to-date have been in people that I know. So I haven’t had to dig in on teams a great deal. The last two investments I’ve made are in entrepreneurs that I haven’t even met face-to-face. Still seems a bit crazy, to be honest, but I’m trying it out. Going forward, more of my investments will be in entrepreneurs that I don’t know well, which means I have to ask more questions about the team and why they’re the ones to run this business.
What about the product?
I love talking product. Ideally there’s a demo in the first meeting (or the second one), or a product that I can go play with on my own after the first meeting. If there’s no product it’s much harder to understand the business. It’s also harder to understand if the entrepreneurs can execute. I like Fred Wilson’s post today, The Pre-Product Phase where he openly says that he’s not good at investing when there’s no product (and only slides, prototypes, wireframes, etc.), so he’s avoided those types of opportunities completely. I’ve invested pre-product, but I’d much rather touch and feel what the entrepreneurs are building. I also like to believe, at least, that I can help on the product side!
My list of questions isn’t set in stone. There’s no particular order, because conversations with entrepreneurs are usually free-flowing. Sometimes we dig deep into a particular issue and don’t get to everything. Overall though, I’m going to work hard over the next year to apply more rigor to first encounters with entrepreneurs (and subsequent ones), and then measure myself in terms of what decisions I make, and ultimately the results that come out of those decisions.
Photo courtesy of f-oxymoron.