Investing in the early stages of a startup can be risky business. The younger a company is, the less data there is to justify its value. Startup valuation reports only go so far, so investors have to rely more on assumptions and intuition. They also rely heavily on what the management team brings to the table.
The importance of the management team to a startup’s success is undeniable. Investors know this, which is why they ask so many questions. Mezy, a due diligence-as-a-service (DdaaS) provider, says the following eight questions are common among early-stage investors:
1. Who are the company’s founders?
Every startup has its founders. Investors want to know who they are, where they come from, etc. They want to know as much about their backgrounds as possible. Figure out where they have been, and you get a good idea of where they are headed.
2. Does the team have a track record of success?
Many startups have management teams that include members not considered original founders. Investors see this as a good thing – just as long as team members have a track record of success. So just like they investigate the backgrounds of the founders, they look into the histories of each team member.
3. What is the team’s experience?
Experience counts for a lot when you are taking a business from startup stage to self-sustaining. However, there are some types of ventures for which relevant experience is nonnegotiable. Investors want team members who know that particular industry. If relevant experience is lacking, they may have a challenging time getting on board with the project.
4. Do team members work well together?
Although this particular question is critical, answering it doesn’t always prove easy. Team members have to be observed as they discuss issues and work through problems. Their performance has to be observed over time. Yet in an early-stage scenario, investors may not have a long time to evaluate the team. They may have to rely more on interviews and past performance data.
5. Does the team understand the risks?
Investors are all about risk. They know it inside and out. The question is whether or not the management team is on the same page. More than one startup has run aground because its founders and management team did not truly understand the risks involved. In such cases, investors are less likely to make a move. Their due diligence tells them not to.
6. How does the team handle details?
Startups do not become self-sustaining by accident. Getting to that stage requires attention to detail. Therefore, investors want to know how team members handle the details of day-to-day business. A team that is not detail oriented may not have what it takes to succeed.
7. What are the team’s resources?
The resources a team has access to partly determine a startup’s success. Ample resources make for a less risky project. Likewise, insufficient resources only add to the risk. Investors want to know about every resource, its availability, and its future potential.
8. Is the team determined?
Finally, investors want to know just how determined the management team is. If they are in it for the long haul, they are more likely to give their best effort day in and day out. Team members who demonstrate even the slightest ambivalence can make investors nervous.
There are other questions early-stage investors ask about management teams. These eight form the foundation. If you run an early-stage company looking for funding, you now have an idea of what investors are looking for in you and your management team.