As the co-founder of Synergy Social Ventures, a Hong Kong-based organization that helps early stage social ventures find the money, skills, and support they need to grow, I spend a lot of time helping entrepreneurs prepare for talks with investors.
In my experience, I’ve seen the massive potential for miscommunication between the two parties. With their financial jargon, investors often get a bad rap for being difficult to understand. On the other hand, entrepreneurs have the dual goals of impact and financial return, an intertwined narrative that can often be difficult to clearly articulate. In general, investors and entrepreneurs come from different backgrounds and perspectives, and consequently speak different languages—a potential barrier that can lead to long-term consequences for both parties.
This barrier grows when teams of founders and investors fail to openly share their critical questions and concerns. To ensure entrepreneurs and investors don’t suffer from easily avoidable miscommunications, here are four fundamental questions entrepreneurs should always ask potential investors.
1. What are the short-term and long-term goals for your investments? How does this investment fit into your overall portfolio goals?
I have seen more than a few investments made where the entrepreneurs and investors had significantly different objectives, but were unaware of the misalignment until months later. Both sides need to clearly articulate realistic goals and expectations up front. The investor needs to clearly understand your business and the way you envision its trajectory. It’s your responsibility as the entrepreneur to convince them it’s investment ready and worthy. Of all the potential high-profit ventures they can invest in, why should they want to support your venture? Why should they believe in your particular business model?
2. What is your social versus financial return expectation? Is 7% or 17% a successful financial return, for example?
Even when speaking with investors, you shouldn’t make assumptions about their financial goals. This should be openly discussed. A lot of jargon is used in investment discussions that is new for entrepreneurs. Instead of making assumptions or being afraid of clarifying what you don’t understand, don’t be afraid to ask basic questions in plain language and talk in concrete numbers.
3. What is your exit strategy for this investment?
The exit is a critical part of the investment relationship. You will want to know how and when the investors expect to be repaid. It goes without saying that growing the venture is the goal, but how will that growth translate into cash back for the investor? For example, what if you find out after a year that the investor thinks the only logical exit for your venture is getting acquired by a large company, whose mission you strongly disagree with? You won’t be happy, but you might be stuck. Asking exit-related questions from the get-go helps you understand the trajectory an investor has in mind for your venture. While an investor might see an acquisition of the venture within five years as a no-brainer, you may have a different strategy in mind. Don’t forget to articulate that.
4. What attracts you most to our company? What gets you excited?
As an entrepreneur, you start a venture because you are passionate about something, whether it’s creating a new product or solving a major problem in the world. Success requires hard work, dedication and sacrifice. It is critical to partner with investors who share the same goals that make the work and sacrifice worth it for you. A shared passion for a common goal is one of the most important factors in the entrepreneur-investor relationship.
As the entrepreneur, you are likely used to answering questions from investors—not asking them. You don’t want to jeopardize a potential investment, or perhaps you feel intimidated by jargon-spewing investors who appear to have more knowledge about the respective sector than you do.
You must realize you have power, too. You can and should ask questions to determine if the relationship is a mutual fit. An investment is a long-term partnership, and misalignment on values and objectives can be even more detrimental to a venture than no investment at all.
This was originally posted in Unreasonable by Jana Svedova.
Jana is the co-founder of Synergy Social Ventures, a San Francisco and Hong Kong based nonprofit organization that supports early stage social ventures in Southeast Asia. She launched this organization after recognizing the need for innovation around how we support social ventures in their early and most challenging stages. Jana is also currently Director of Impact Investing at the Sauder School of Business in Vancouver, where she previously led the Coast Capital Savings Innovation Hub, an award-winning social venture incubator program.