Investing in a Start-Up: Essential Questions to Ask

In lieu of this weeks material, my blog post this week will be discussing important topics and questions to think about when investing in a business. Although I am no investment guru, I stumbled across a few articles this week that made me think about all the important things to consider before investing your personal or a VCs money in a start-up business.My favorite article that I read this week was 65 Questions Venture Capitalists will Ask Start-Ups, by Richard Harroch. I will spare your time and refrain from discussing all 65 questions, as you can read them another time, but one thing I do love about this particular article is how it places sets of questions into 12 different categories. Those categories are as followed:

• Overview (of the company)
• Market
• Founders & Teams
• Products & Services
• Competition
• Marketing & Customer Acquisition
• Traction
• Risk
• End Game
• Intellectual Property
• Financials
• Financing Round

Thinking about particular questions in these 12 categories is something that I see as essential when considering making an investment. The specific questions you chose to ask may… WILL vary based on the company at hand, but I think these subsets create a simple and effective foundation for an investor at any level. Many of the other articles I read followed these same or similar categories. The article 100 Questions Investors ask Startups When Pitching use the same categories, although many of the questions differ from the first article.

Other than these two articles, most of the articles share their 5, 8, and 12 essential questions to ask before investing in a startup, and each of the articles truly offers a different set of questions from the last. Does this inconsistency mean that there are no meaningful questions to ask before investing in a startup? Absolutely not. What it means to me is that each investor or group of investors is looking for something slightly different in a company. The article Why People Invest in Startups has an excellent excerpt that explains my last stated point perfectly:

No Two Investors Are Alike

While not quite as diverse as snowflakes, very few investors are exactly alike. Some invest on their own behalf or on behalf of an entity. Some want to be actively involved in the startups they invest in (and will only invest in those instances where they feel they can add value), while others are simply looking to diversify their portfolios. Investors in our network routinely express a wide range of preferences regarding investment amounts, industries of interest and disinterest, company stage, valuation, geographic location, revenue generation, and various founding team characteristics.

Investors and VC firms decide to invest in companies for different reasons, and these reasons are ultimately what is going to help these individuals and groups formulate the questions they will ask to a prospective startup company looking for funding. As stated earlier, I believe the 12 categories above are an incredible starting place for investors interested in funding a startup, but the questions that you decide to ask will depend on an investors reasoning for investing and on the company being questioned. Although there are a plethora of “Essential Questions to Ask” articles circulating the web, only you as the investor can decide which questions will produce the best answers for you, your money, and your future in business!

Self Funding – Smart Idea or Sleeping Disaster

While trying to figure out what to write this blog post about, I stumbled across an article  titled, 10 Reasons Why I Self-Funded My Startup and So Should You. Based on everything I’ve read thus far, and everything we’ve talked about in class – none of which involved self-funding – I thought this article would be an interesting read. Before even reading the article, I had a few questions for myself. Who could really fund an entire start-up ALONE? Are there other benefits to different kinds of funding, other than the money? Is fund raising really that bad? I decided I would go ahead and entertain myself by reading the article, thinking that maybe the author, Jon Yongfook would make some interesting and valid points.

The following are the 10 reasons why Jon self-funded his business and thinks you should too:

1. You are forced to focus on revenue
2. You don’t waste time raising funding
3. You don’t answer to anyone
4. You learn the value of money faster
5. Early stage investing is rife with dubious characters
6. You feel free to grow organically
7. you learn what really matters
8. You’re in good company (bootstrappers)
9. You work on something that truly interest you
10. You increase your leverage for future fundraising

Throughout the article, I though Yongfook made some good points. When you are funding your own business, you get to remain in full control and don’t have to answer to the many investors that will be helping you fund your company. Many entrepreneurs get into creating their own business so they no longer have to answer to a boss, and often time investors can seem like just that. I also agreed with Jon’s point that “you are in good company.” When funding your own business, it is almost inevitable that you will end up connecting with individuals who are also funding their own business. This small network of people can help self-funders find ways to be more successful and solve problems that are unique to their situation.

Although Yongfook made some good points in the article, I think more often than not he is simply discussing trade-offs that occur when one decides to self-fund versus fund raise. For example, he talks about not having to waste time with fund raising, and while this may be true, the times pent fund raising now has to be spent finding alternative ways (taking on extra jobs) to fund the startup. Also, even though those that self-fund don’t have anyone to answer to, they are missing out on possible mentoring and advising experience that can come from seasoned investors. a perfect example of this is ABC’s hit show Shark Tank – I know, not the most educational example. Many people participate in this show not only to get their business funded, but also to gain the expertise of a business savvy “shark”, in their respective field of business.

In my opinion, a company can be successful whether they decide to self-fund or raise funds through other means. I think it is most important for each entrepreneur to evaluate the status of their startup, and decide what is the most reasonable and beneficial way to raise money.Ultimately, each entrepreneur will need to look at the pros and cons of each and decide which route is best for their particular company and personal situation.

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References:

http://yongfook.com/10-reasons-why-i-self-funded-my-startup-and-so-should-you.html