It is that time of the year, we’re making the tough decisions about which startups we will invest in next and take to join our portfolio. We have screened thousands of startups and there are a few questions that we definitely ask founders to narrow the playing field and decide where to invest capital to ultimately deliver potential outsized returns for the fund.
After combing through applications, pitch decks, cap tables, founder videos and business models, at Accelerating Asia we do multiple rounds of interviews with startups before the investment committee. There are some common questions that we ask which help us get a better understanding of the business models, unit economics and founders because founder quality is definitely a focus in early stage startups.
They’re questions that as angel investors, you can also apply to your screening and selection process.
So, here are 5 questions we ask and you can to before you invest.
- Why did the founders start the business?
This answer gives a clear insight into the minds of the founders.
We often meet founders who talk about a bad past experience or an opportunity they saw in the market. There is no right or wrong answer to this question, just a subjective interpretation of the validity of the idea depending on one’s own beliefs.
Things to look for in an answer are the conviction in the founders’ response and a passion that they want to scale the business to newer heights.
It can be a red flag if the idea is good but the founder does not seem committed to the startup - because at the end of the day it’s a long term relationship and you are looking for founders who will stay with the company and see it through to exit.
This question also allows founders to articulate more about the product, the market and the opportunity at hand. Not only does this question give you access to what the founder is thinking but also the quality of the product and opportunity.
- What background do the founders have?
This question helps ascertain whether there exists a good founder and product fit. Founders with relevant experience or education background in the industry they are operating in gives investors a peace of mind.
Founders who do not have a background in the industry they are operating in but have self educated themselves serves as a sign of promising founders. You generally want to look for a good product and founder fit. Founders who are detached from the product they sell or the industry they operate in do not seem to be promising bets.
- What are the challenges that the founders are facing?
Any business despite its maturity or their resources faces challenges. Challenges get accentuated for early stage startups because of the paucity of resources at their disposal.
Looking for founders with a can-do attitude and who will take action can ultimately make your investment perform better. Running a startup can be taxing, founders who look for ways to solve their problems versus founders who crack under pressure are well placed to deliver returns on investment
- Why do you need the money?
Founders should have a clear road map in their minds about what they need the money for. Whether it be to reduce bottlenecks in business, improve supply chains, expand into new markets. Then an idea about how much it will cost and what returns can be generated. Yes, startups might not be able to come up with accurate projections and some variables might change their focus. But as investors you want to see founders who know what they are doing and will be able to put the money to the best use. An investor is in a startup to make money, hence, it is important for the investor to see how his/her money is being used.
- Are there any similar business models in other parts of the world?
If the answer to this question is yes and those businesses have been successful then that serves as a validation to an investor’s investment. If the businesses have crossed Series B or are in pre-IPO stages or have IPO-ed then such traction will also serve as a good narrative for future fund raise. The current set of founders can also look at what made these businesses successful and can implement the same in their own geographies with a sufficient amount of localisation.
It is natural for investors to be risk averse and keep asking questions to ascertain whether a startup is a good investment proposition or not.
There’s a lot more questions to ask Founders when considering investing, these after all are just 5 questions that you should ask. It’s also important to go above and beyond before investing, taking deep dives into the cap table structure, fellow investors and business models to determine the potential for return on investment.
If you’re interested in connecting with our startups, investing alongside us or just generally interested in talking to us about startup investing, please reach out and tell us a little bit about yourself.