Read This Before You Invest In A Startup Or New Venture

Written by Mike Shapiro | | December 15, 2016

Here’s the first thing: Look beyond the story and the confidence of the founder. 

Too many times, investors don’t get much past the “secret sauce” — the unique breakthrough idea — and the founder’s story, previous track record, prestigious pedigree (e.g., MIT lab), boundless enthusiasm and personal charisma. Consciously or not, they’re really taking the lazy way out by assuming: “Well, he or she knows more about this than we do, and if he or she is confident, it must be a winner.”

This is a sure way to let a lot of people down — customers, employees and other investors. And it’s no substitute for getting out, rolling up some sleeves and kicking some tires by asking a few questions.

Here’s the second thing: With a little bit of effort, every investor can get a lot of information and save everyone a lot of wasted time, effort and money.

Before you say yes, ask the entrepreneur/founder these questions:

  1. What is your definition of success of this venture? What will it take to bring the big idea to actual commercial usage? What will you see and hear along the way that will tell you (and us) you are on target for that goal and in what time frame?
  2. What does the financial picture look like? When’s the expected turn around? When is the profitability point? What are the assumptions underlying these predictions? What has to happen to make them come true?
  3. Show us your environmental analysis, your SWOT — Strengths, Weaknesses, Opportunities, Threats. How do you plan to use your Strengths, compensate for your Weaknesses, seize your Opportunities and anticipate and manage, minimize or neutralize your Threats.
  4. How did you arrive at the amount of money you are asking for, and exactly what are you going to do with it if we give it to you?
  5. Who are the main people working with you? Who are your attorney and accountant and do they have experience in the specialties you’ll need like intellectual property, real estate, governmental affairs, etc. Have they seen this presentation and what questions did they ask?
  6. Who are your outside advisors? Have they seen it and what were their questions and comments?
  7. What are your plans for hiring? Employees? Contractors? To do what?
  8. What do your quarters look like? Will they accommodate the people you plan to bring on board?
  9. When are you coming back to give us an update on this presentation?
  10. How will you communicate with us in the meantime?

Then get out the calendars and set some dates certain for update meetings.

Everybody likes a compelling story told by a confident storyteller. But when you’re going to put up some money to launch a new business, you’re setting a lot of things in motion, and you should be challenging and testing the assumptions behind both the story itself and the confidence of the person telling it.