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