The Only Three Questions An Investor Asks Before Investing

If you want to get funded, you'd better have answers to these three essential questions investors ask themselves.

About fifteen years ago, a venture capitalist told me "I only ask myself three questions before I invest: "Do I want to be in this business?" With this team? At this time?"

Those phrases have stayed with me, and I've shared them with countless entrepreneurs over the years. Notice what isn't said: anything about the product or service.

Do I want to be in this business?

That should tell you that it's never about the product or service, but about the kind of business that can be created around it. Good businesses are often created around mediocre products. Microsoft, for example, never has the best product but has an incredibly profitable business.

And some products, while they may be good ideas, will never result in an investable business. We had one woman in our entrepreneurship class who had designed a circular planter for gardens. It was designed to fit around trees. By running the numbers, we realized that while her idea and design were good, her market was limited and she might not be able to support herself continuously (much less pay back an investor) with this particular product.

Other things that make a bad business include too many regulatory hurdles, illegalities, and inability to secure patents, licenses, or materials.

Do I want to be in business with this team?

Okay, I like the potential for this business, but are these the people to get it done? This is probably the most important question an investor asks himself. Sometimes a team is too inexperienced, lacks domain expertise, or isn't fully committed.

I see entrepreneurs every day who are trying to do it all themselves. They don't have a team, and they think it's because they don't have money. Quite the opposite; they don't have funding because, among other things, they don't have a team. A single founder is a bad bet: certainly she is weak in some aspects of running the business, and there's no one else with different strengths. In addition, a one-man team doesn't pass the "bus test": if the founder got hit by a bus, could the business continue?

The best entrepreneurs generate so much enthusiasm for their ideas that other people jump on just for the experience or for shares in the company. If they won't, they're probably not the right people to work in a startup. People in a startup are not in it for the money in the short term. And the founder can't raise money just to pay himself a salary.

Do I want to be in this business at this time?

Is this the first company in the space (bad because you will have to educate the market and that's expensive) or the 50th (bad because the space is over-saturated?)

In markets, timing is everything. Too early and you have to ride the hype cycle up and down before you can get decent traction. Too late and there's not enough market left to capture.

Think about that when you're trying to build a business. Are you attractive enough as a business opportunity, with a strong team, coming to market at the right time? If you are, you will get funded.

[Image: Flickr user Vlastimil Koutecký]

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5 Comments

  • Floris Koot

    There's one more aspect that every modern investor should ask: Does it contribute to the world and not further damage the environment? While this seems a sub question of number one: we definitely don't need more pollution, slave trade and destruction of natural environment or resources. Sounds green? Its the best investment ever. It's for the far future, for your grand children, to be not arrested at some point for being a crook and brands that contribute will be able to build fan bases that outshine Apple and Harley Davidson. For the world is changing and the need for global awareness is getting more and more urgent.

  • Thomas Knoll

    I love these questions, Francine! Thank you so much for sharing.

    I think it would also be helpful for more entrepreneurs to add their own question to the list, "Do I want to be in business with this investor?"

    In the scramble to close checks and get piles of cash in the bank, it is far too easy to neglect this question and take a check from anyone we can 'pitch hard enough' to convince. But, down the road, when we actually become a successful business (or whenever we start to hit some bumps), it would be much better to have investors on board who we trust and respect.