What do investors need to know about the startup to invest?

Typically, investors who are not completely naive will need to know the following things:

Litmus test questions:  

  • Is it a GREAT team? A team that works well together, has the requisite skillset, and the grit to overcome obstacles and figure it out together when they encounter hardships?
  • Is it a big enough idea with a big enough market?
  • Are they working on an idea that fits in with our investment thesis?

Nuts and bolts questions:

  • How much are you raising? (huge range from a couple tens of thousands of dollars to millions of dollars)
  • How long will this last? (Typically 12-18 months. Any less- and you will be hugely distracted constantly raising money and not getting stuff done)
  • What do they get with this money? This is the business and strategic milestones they expect to see. For instance. Stuff that fits and obviously cost money:
    • Build out the sales and marketing department to power the direct sales organization for enterprise sales
    • Acquire ABC customers in certain time frames (e.g. pilot, full rollout, etc; seat count, other measures of scope and scale)
    • Build out tech functionality to support the acquisition of ABC customers
    • Strategic hire for e.g. a Chief Something Officer to round out the leadership team
    • … etc
  • How do you intend to run the business to arrive at the above milestones?
    • Think about the org chart. How will you organize the humans to do the work?
    • Think about the program plan. What is the working approach? How do you break down tasks and work? What resources do you need (headcount, license fees, equipment etc)?
    • Think about the operating plan. How are you spending this money and how fast
      • For a software company this typically shows up in headcount and consulting fees if applicable.
      • For regulated industries like healthcare and financial applications, add consulting fees and testing fees to arrive at regulatory compliance
      • For a hardware company, add consulting, prototyping costs, and any tooling costs ( if applicable and not covered with a separate line of credit or venture debt)
  • What are the terms for the promissory note?
    • What is the discount?
    • What is the valuation cap if any?
    • What is the maturity date if any?
    • What are the provisions upon an exit event such as an acquisition prior to maturity date?
    • What are the provisions if the company does not raise a round within the maturity period of the loan?
    • … etc
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