I’m always amazed at how many early-stage investors will commit to investing in a company after only one phone call or meeting — especially those who have a fiduciary duty to LPs. Unless you employ a shotgun strategy of investing in every startup whose founders have a pulse and hoping the law of averages works in your favor, how can you possibly learn enough about a company and its founders after a one-hour interaction to persuade you to invest? I certainly understand passing on a deal after a first meeting, but I don’t understand investing.
As a byproduct of these quick-triggered investment decisions, an atmosphere has been created where founders have little tolerance for investor inquiry. They often take offense at having to answer questions, provide documentation or explain themselves. This amazes me even more than investors not conducting a thorough (or even cursory) inquiry.
I have a reputation for asking a lot of questions. And yes, some startup founders get annoyed by it. They are sometimes even reluctant to answer preliminary, qualifying questions designed to make sure the company looks like an initial fit for us before we both dedicate time for a meeting. I often joke that asking insightful questions is my one and only superpower. I feel strongly that if you want others to invest their money in your company and entrust you to wisely manage and grow it, you should be prepared to answer a lot of questions.
When we ask founders questions, we are not just looking for the answers. We’re trying to get a feel for how the founders think about the issues facing their business and their vision for where they want to take the business. This process helps us to learn more not just about the company, but about the founders themselves.
Most early-stage investors will agree that the most important determinant of startup success is the founding team. The assessment of a founding team goes beyond just reviewing their backgrounds and experience and determining whether you are comfortable with their temperament and personality. Ideally, you want some insight into how they think. How they approach problems. How closely they attend to detail.
As I have written about before, in order for us to understand founders and their companies, we need to conduct a thorough review of their financial projections. This includes questioning assumptions, understanding the drivers of growth, and making assessments of reasonableness. In order for founders to project scaling their startup from X to 10X, they must make certain assumptions. We want to understand the basis of these assumptions and to determine if they represent a logical progression from the company’s current position. We are not looking to make leaps of faith.
I want to make it clear that I am not suggesting that founders should indulge investors’ unreasonable or excessive requests. The question is what constitutes an unreasonable or excessive request. Where do founders and investors draw the line? Investors must be respectful of founders’ time and do their homework first so that they can ask smart, thoughtful questions. They also need to be careful not to ask superfluous questions as a technique, intentionally or not, for forestalling their investment decision due to ambivalence or uncertainty. Excessive inquiry must not replace introspection.
The question, again, is: Where is that line? I contend that the line has moved too far away from founders’ willingness to provide information to potential investors. I do still hear from some founders that they appreciate our level of inquiry because it signifies that we are taking their request seriously and that we will be more valuable, better-aligned and better-informed investors if we do invest. They also tell me that our questions have made them think about their business in new and different ways. Sometimes an outsider’s perspective can do that. But we don’t see this attitude frequently enough.
Investing money, whether your own or your LPs’, is a serious matter worthy of, even requiring, detailed inquiry. Seeking investment in one’s company is an equally serious matter that requires openness, candor and a willingness to educate potential investors about the various aspects of your business, its founders and your vision for the future. Even more, it is an exercise that, within the bounds of reasonableness, founders should welcome with open arms. Tough questions make founders better, and the discipline of thinking through and justifying all assumptions increases the likelihood of a company’s success.
Phil Nadel is the Co-Founder and Managing Director of Forefront Venture Partners (www.forefrontvp.com). Follow him on Twitter: @NadelPhil or on Medium at https://medium.com/@pnadel.