This post is written from the perspective of the investor as a tool, to be used by entrepreneurs seeking investments for their respective business opportunities. An investor will ask certain questions during the negotiation process; these questions are used to determine the legitimacy of the idea and the value of the opportunity being presented. The questions allow the investor to learn about the entrepreneur as a person in addition to the business opportunity. As an entrepreneur seeking investment in a business opportunity, perpetration is essential to signing a deal. The following 20 questions are used by investors to determine the opportunities value which in turn factors into the decision of whether or not to make the investment. These questions are not a guarantee for success but if you have a strong business model, a good opportunity and market demand, and have the ability to answer these questions successfully during the negotiation process your chances of signing an investment will sufficiently increase. Each question will assist entrepreneurs in understanding the investor’s perspective during a negotiation. The questions will progress in the logical flow that takes place over the course of a negotiation, as follows: Initial meeting and pitch, the evaluation of the business opportunity, and the investment terms and recommendation.
The first 10 questions tell an investor about the individual seeking the investment.
This will most likely be the very first initial question any investors will ask themselves when meeting with a perspective investment opportunity. The investor will answer this question within seconds of the individual’s introduction, analyzing key physical and character traits. The main trait investors are looking for consist of strength, motivation, and passion. These combined traits exude an individual’s confidence not only in themselves but in their respective ventures. A few points to note to make a successful introduction are: proper dress attire, the individual must look the part to be professional, physical posture which includes a strong affirmative hand shake, awareness of the situation, the surroundings, and proper preparation. Passing the first question may be one of the biggest mile stones of the meeting; this can really have a profound impact on whether you make it to the following questions.
Determining an individual’s drive and determination are key elements in evaluating the possible success of the prospective opportunity. The entrepreneur must give off the impression that the individual is dedicated to the success of the venture and that they will not give up until the finish line has been crossed and even then that they will continue to pursue success. The individual must be passionate about being successful not just having a successful venture. Ideas and trends are always changing; the ability for the entrepreneur to transfer their passion for success from trend to trend is an important factor in the investor’s analysis of possible investment in other venture forms if the initial investment is successful.
The investor is looking to see if the individual is hungry for success, if they are willing to “work unlimited hours, and live off of mac and cheese” (Mark Cuban), in order to make the venture and all future ventures successful. If the individual is lethargic and lack luster the chances of retaining an investment agreement are significantly reduced. Note that being passionate and driven does not mean the individual is exuding to much emotion; they must practice having solidarity in emotion as to continue to convey strength throughout the negotiation. The individual may lose sight here when not fully prepared for the situation and at this point is when emotion begins to show. Perpetration will help aid in the solidarity of emotions.
This question is one the investor will ask them self internally, externally it may come in an assortment of questions that all equate to answering this main underlying question of the individuals education. The investor is looking to gain an understanding of the individual’s knowledge of the industry or the overall picture, the market or the specific area of the industry the individual’s opportunity is focusing on, and the individual’s knowledge of their own business and operations. How much knowledge does the individual have in the latter areas of the perspective venture and how is it being applied to the venture.
Having knowledge of the industry allows for the vision of future trends, current trends, and the competition within the whole of the industry. Industry is the first phase of knowledge the investor wants to know. For example if your product is dog food your industry would cover all animal food markets including cats’ rabbits and dogs. The second round of knowledge come from the ventures specific market, and the individuals knowledge of the ventures niche within the industry i.e. the individuals product being dog food, falls under the niche market of food for dogs within the industry of animal food, the individuals knowledge should prove to the investor that research has been completed, and at the very least a general outline of the industry trends, opportunities have been properly evaluated and holds the proper value needed for a successful retune on the investment. Having an understanding of the industry and market should equate to a strong knowledge of the business and how it should be structured to compete within the industry and niche markets, and that a continuing acquisition of the latter knowledge is continued through the life span of the venture.
This question is also a question asked internally by the investor, and is answered through the latter 3 questions as well as through other questions specific to the venture that allows for the investor to determine the resourcefulness of the individual. Resourcefulness is an important quality within the business would, the individuals will not always have the necessary assets to do tasks a designated way, this does not excuse the fact that the actions still must be completed by any means effectively and efficiently. If the investor can answer yes to this question the venture becomes more plausible in their eyes, the investor now has a decreased amount of stress and worry knowing that the individual can handle a tough situation without breaking down mentally and physically which may have a negative effect on the success of the venture.
This may be one of the most influential questions asked when analyzing the individual’s character and work ethic. To investors the character traits that allow the individual to overcome the many different forms of adversity that take place not only in the business world but the personal world too are essential in determining whether or not investing in a venture will be successful. An entrepreneur that can overcome adversity, and continually keep a level head in every situation has a much more significant chance of completing an investment deal. Having the traits needed to overcome adversity prove to increase the investors level of trust and lower the investors level of stress and concern for the ventures well being on a day to day basis. The answer for this question will be determined by the investor through the answers to the latter 4 questions that have lead up to this point in the negotiations, based on resourcefulness, business knowledge, drive, and character.
This question is one the investor also asks internally it is something that is determined through venture specific questioning, and is another key factor in determining the drive, and passion of the individual for the venture. Investors will always be more apt to sign the deal if they can see that passion is the driving force behind the venture. If money is what is driving the pursuit of the venture the investor we consider the validity of the venture and the individual. The investor will determine the answer to this question through an analysis of the individual’s enthusiasm for the venture which translates to the overall passion the individual has for the product or service being presented. Her it is important to note that emotional solidarity is a strong player in answering this question; the individual can show passion is the driving force but can also go too far the display of passion. Without a level head the individual loses credibility in the eyes of the investor.
The investor will ask this question maybe not so directly in different circumstances but they will be looking for the same answer no matter how the question is worded. The investor wants to know what the future has in store for the venture, where does the entrepreneur plan to go with the venture, how big does the individual see the venture getting over time, how much time does the individual plan on spending with the venture in terms of years (5-10 or less). Other questions are implied by this question such as product and product line expansion, physical as well as monetary growth. Also included in this answer will be the venture exit strategy and its thoroughness.
Consolidating the questions that encompass what the venture’s vision is completes the product of what the investor is looking for as far as an answer to this question. At the very base the investor is looking to see that the individual has framed their vision for the venture, that they have set a standard of future goals that will mark the success of the venture into the future. As an entrepreneur going into an investment meeting it is vital to the possible deal that the individual knows and has framed the ventures vision in a way that conveys the traits necessary for the venture to succeed and the investment deal to be signed.
At this point in the negotiations the entrepreneur and the investor will have been exchanging discourse about themselves and the venture opportunity for a significant amount of time. The investor will have asked many questions that question the actual foundation of the venture idea, testing the ideas validity as well as the validity of the entrepreneur. Some of these questions might hit the individual personally or may feel like a negative attack on the venture idea, and here is where the consistency of emotional solidarity is crucial to the success of the deal. The investor is not attacking the individual or the venture they are merely trying to analyze the opportunity and make the best possible educated decision when it comes to making an investment. The investor will ask themselves internally whether or not the individual can take advice and deal with criticism. Dealing with criticism and accepting advice is crucial is the eyes of the investor and provides a key piece of information in determining whether the individual holds traits that will allow them and the venture to overcome adversity. As an entrepreneur one should be receptive to all criticism and advice given by investors, most likely the investor has money for a reason and has a level of experience and knowledge not attained by the individual to date. A word to the wise be receptive to the investor to increase the chances of passing this question successfully.
If as an entrepreneur you were able to successfully pass each of the previous question then this question should be an easy one for the investor to answer. Either the individual was prepared and answered every question with knowledge and poise or the individual did not resulting in the distaste of the investor. This question will be answered swiftly and efficiently through the investor’s analysis of the answers given to the latter 8 questions. If at this point the investor can answer yes the individual was prepared then the individual has successfully passed the introduction phase of the investment meeting. The next step for the investor before moving on to the marginal analysis of the venture to determine the financial validity and the possible successful exit valuation is the analysis of the entrepreneur goals of the venture.
This question may be asked flat out by the investor, this can be analyzed and argued upon but when it comes down to it, goals are essential. Like the framed vision the goals must be framed and mapped with smaller goals that lead to bigger goals. If this is complete the investor can determine that the individual is goal oriented a trait that is essential in the investor’s decision to sign a deal. At this point he investor will also assess what goals have already been established what actions that have been taken, and what goals have been accomplished. These three aspects help the investor to determine the current standing and phase the venture is in. the entrepreneur who has set goals and accomplished at the very least a solid amount of goals is at a much stronger bench mark in the eyes of the investor.
I will refer back to the dog food venture, as an entrepreneur goals have been set and completed prior to the investment meeting. Some of these goals may be as follows: create an organic dog food that is better for the consumer’s dog than any other dog food at a competitive price, implement a marketing strategy to incur product sales and brand awareness. By completing the goals set in the latter example the dog food venture has accomplished solidifying a product, a competitive advantage, and has incurred cash flow and possibly revenue or at least has attempted to do so. To the investor results are present and tangible a valuation can be made on the current standing of the company base on the goals accomplished thus far enabling the investor a strong appeal for investment.
The investor to determine the individual’s level of social interaction, and to judge the individuals character traits uses the first 10 questions. The questions of character combine to answer 2 of the most important underlying questions in the mind of the investor, is the individual trust worthy, and does the individual meet the investors standards. Having strong character traits allows for the individual to pass the initial set of questions successfully, this does not guarantee that the investor will sign a deal but it does guarantee consideration and the entrance into the next set of 10 questions that will cover the venture opportunity, a valuation of the venture, and possible terms negotiation for an investment deal.
The second 10 questions tell an investor about the individual's business and the structure of the investment.
This question will be asked directly by the investor, and is the essential first question in analyzing the venture opportunity. This question serves to inform the inventor of the ventures industry and market value, and how the product or service is being utilized within its respective industry and market, along with the competitive advantage that it might offer
The first step is the valuation of the industry; this determines how easily it will be for the venture opportunity to make money or for it to acquire a percent of the industries revenue. Step 2 is for the investor to valuate the markets potential, the target market is established and the niche market value is assessed. Finally the investor will evaluate the product of services competitive advantage against the other industry and market competition. For example if theoretically the animal food industry is worth 22 billion dollars annually, and the niche dog food market represents 20% of the industries revenue at 4.4 billion dollars annually the investor will determine the percent of possible revenue from the dog food market can be obtained through the ventures competitive advantage. The investor will combine the valuation and use this information combine with the next 9 questions to make a decision on signing an investment deal.
This question may be asked by the investor internally and externally, what this question does is to discover and analyze what the product or service is doing to solve a consumer problem. Questions that fall under this question like what value is being added by producing this product or service, does the product of service satisfy a need, and do it improve the slandered of living. If the venture does not address a market problem then its value is diminished. The entrepreneur has most likely created a product or service that addresses a need within it market and by satisfying the consumer needs the individual is improving the consumer’s standard of living and there for has created value for their venture in the eyes of the investor.
Referring back to the organic dog food venture one can say the entrepreneur had done their industry and market research and assessed a problem with in the market of dog food. The individual has found that there is no company offering organic dog food, at the price a middle class family can afford. A problem has been addressed and it is now up to the individuals venture to prove that their product can solve the market problem and make it into a market opportunity.
This question addresses weather or not the individual has use the venture to create an opportunity from the problem they have addressed by creating the venture. Has the individual appropriately assessed the market problem and have they created a solution the produces a solution with value. Value is a key aspect of this question, how strong is the opportunity, and how valuable is it to the market and to the industry. An investor will be satisfied if the answer to this question is yes the individual has created an opportunity out of the given problem and the solution has substantial value for both the venture and the investor.
If the venture is organic natural dog food at a cheaper sales price then one can say that if within the market there are no competitors who are producing the same product at the same sales price the individual has found a problem and has addressed a need by creating the perspective venture. The product improves the life of the consumer by improving the life of their pet dog while still keeping them at an equivalent or lesser sales cost, the investor will retain that the product has addressed a problem and created value which translates to positive revenue for the investor.
The investor now knows about the industry, market, problem, and opportunity value. The next question that will be asked has to do with the protection of the ventures intellectual property. This is important because without licensing, trademarks, copyrights, exc. The venture may be susceptible to theft if applicable to the ventures product or service. This question may or may not apply but if it does apply the individual must be sure to have his ideas protected. If the venture requires protection and the individual has attained those protections they will gain an advantage in the negotiations as the solution to the problem addresses is the property of the individual and no one else’s.
It is important for the investor and the entrepreneur to know not only market competition but industry competitors as well as they all have some kind of impact on the venture at hand. This question gives the investor insight into who they will be competing with if the deal is made as well as how difficult the investor should suspect acquiring a percent of the industry revenue will be for the venture. Another benefit of knowing your competitors, is knowing how your niche fits with in the market and the potential information you can gain from the practices, established competitors are taking that may also work to benefit the perspective venture.
Is the problem being addressed a real problem and is the opportunity created real and valuable to the investor and the consumers. This question covers the investors’ concern for the size and structure of the market, is the market large enough to make substantial profit. If the market is to small the venture is insignificant and so would the investment, and is the market structure in a way that will allow for the product to be sold with out to many barriers. Finally what is the market demand how effective is the problem, and is there enough demand based on the problem that the market is demanding a solution adding value to the venture. If there are high barriers and no market demand the venture is less likely to be successful and therefor the investor is less likely to sign the deal.
Referring back to organic dog food, if the market is structured in a way where only massive amounts of dog food may be purchased at once but eh individual does not have the production capabilities to address the large order sizes and the cost of creating a production facility is to large of a dollar figure for any investor to see profit, the value of the venture is diminished. Likewise if there is no demand by the consumer to purchase organic dog food and the market is content with the products at hand the value is again diminished. This relates back to the strength of the opportunity created and the value added by addressing a market need.
By now the investor has assessed the value of the product as either strong of weak, and now wants to continue onto the physical evaluation of the product or service. . The investor will expect to physically see the product or service when this question is asked. This is a short and simple step that may involve specific question pertaining to the product or service and the physical features it offers.
In the case of organic dog food the investor would want to see the label and packaging, the product description, and nutritional facts that pertain to dogs, the content of the food. This is a simple physical analysis by the investor to see what the individual has as a product and evaluate the style set in place thus far.
Questions 8 and 9 are essential to the investors’ valuation of the venture and whether they can envision a successful exit valuation. First how much does the product cost the venture to produce, and then the investor will ask how much is the retail value, or what the price of the product off the shelf is. Combining these 2 questions the investor can determine the value gained from each individual unit of sale. A simple equation is used: cost of production – retail value = unit revenue. If for example each bag of dog food cost $10 to produce and is sold retail for $30 then the unit revenue will equal $20, this is a substantial profit margin for an investor. Now that the unit value has been established the investor will want to know the current value of the venture in coordination with the amount of time the venture has existed.
By asking this question the investor is aiming to understand the current cash flow, the business model, and project a value for the venture. The amount of current cash flow is important to the investor valuation of the venture. If the venture has sold 1000 units in 1 month at a cost of $10,000 and a profit of $20,000 cash flow has been retained the current value of the venture is $30,000. If this is the constant rate for the first year after 12 months the projected value in revenue will be $360,000. This proves a 3x business model for the investor, for every $1 invested there is a return of $3 with a profit of $2. As an entrepreneur your chances of signing a deal are increase with the multiple of the business model 10x is more likely to sign a deal then 3x, but if the volume of the orders is large enough then the return will be substantially larger in correlation. This is the most basic assessment of a ventures current and projected financials. Investors will search more deeply for financial information if necessary to insure a successful investment. This valuation is the determining factor in the investors offer or counter offer and comes down to the main point of whether or not the product or service can be successful. Note if your product or service has no sales and is still a prototype these numbers may be theoretical but will have less credibility.
Questions 10 and 11 assess the valuation and the offering through 2 key points. These two questions are essential after the initial asking price of the investment weather it just be money or equity included.
As an investor always looking at the bigger picture, what the individual is going to do with the investment is extremely important. The venture may need money for a multiple of different aspects but some of these may be a waste of money in the eyes of the investor. So this question is essential to know whether or not the investment money will be directed to the correct areas of the venture and that the money will positively increase the consumption of the product of service. If the organic dog food venture needs to increase the size of its production facility in order to supply an increased number of orders this is a positive investment, if the venture is seeking change the branding and other such aspects that are insignificant to the sale volume of the venture the investment money will be perceived as being wasted unless the banding has not been complete and is a necessity for the completion of the ventures product.
This last question is the deal sealer or the game changer. The investor is investing money excepting a return of some sort whether it is a percentage of monthly revenue, or a time to pay back plan, equity or other terms agreements. The bottom line is the investor wants to receive their investment back and some. What each investor is looking for is a successful exit valuation, in 5 years will the investor has their money back and be able to retain some percentage of revenue in return for the investment funds if there is not return then there will be no investment. Every investor knows the risk of investing and the bigger the risk the more money at hand but principle is principle and no investor wants to fail. Being able to negotiate and agree on a form of return will seal the deal for most investment agreements.
Knowing these 20 questions and being fully prepared should give the entrepreneur an advantage in the negotiation process at the very least it should iron out any problems the individual might have within the venture or structure of the business opportunity. The individual may not have the upper hand in the negotiations but any preparation to this extent will aid the individual’s goals of obtaining an investment.