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Today, we've put together questions co-investors can use to determine if their lead investor would be a good fit.
Sure, the internet's buzzing with chatter about what topics angels choose to discuss with startup founders (and vice versa) or what LPs should wonder about GPs. But what about the essential questions co-investors should ask the lead investor before getting into the syndicate? Not enough words on that, even though conversations’ role in building trust trumps data rooms and standard decks.
That's why we've curated a few tried-and-true questions (beyond the obvious budget issue) to help co-investors gauge whether they should "swipe right" and collaborate.
👉 Are you well-versed in this niche?
The co-investor's leeway may be more limited than that of a lead, making it crucial to ensure that he/she is a reliable guide. Ideally, the lead should possess secret knowledge. However, as we all know, actions speak louder than words. So, thoroughly examine the lead investor's track record and do not fall for mere assurances.
👉 What led you to unearth this opportunity?
It's important to gauge the strength of the lead's network and investigative skills. It helps to address the "adverse selection" issue which is a cornerstone problem in lead/co-investor relationships.
👉 Why are you pitching me this deal?
Of course, this question is only relevant if the lead himself approached you with a pitch, or if you're teaming up for a specific deal — though our experience, the latter is often the case.
Delving deeper into your potential partner's priorities and finding out why he/she picked you and other co-investors for this ride is crucial. As well as uncovering how many investors have walked away from this project and what made them do so.
👉 What portion of the investment comes from your own pocket?
The higher the lead's investment percentage, the more confidence they likely have in the project. Keep in mind, however, that the reverse isn't always true. If the lead isn’t eagerly investing his own money, it shouldn't automatically become a deal breaker.
👉 What convinced you of the project's profitability?
Measure the lead investor's level of involvement in the project and the basis for their hypotheses. The green flag is when the investor has interacted not only with the startup team but also with their customers.
👉 What drew you to the founder(s)?
It's not just about the numbers; chemistry matters, too. Have the lead investor share the impressions of communicating with the founders and key team members.
👉 How do you perceive the risks and challenges in the industry?
This question helps to ascertain the investor's awareness of the market. And also to roughly visualize the action plan in case things go south.
👉 Am I expected to bring the expertise?
Unpack the expectations up front: are you simply writing checks, or will there be instances where active participation is required?
👉 What's my responsibility if the deal falls through?
Shared passion is great, but it shouldn't make you ditch your responsibilities. Discuss from the outset how the costs of a dead deal will be paid for.
👉 If the deal is a hit, what's the exit strategy?
Since you most likely won't be able to exit on your own, you need to agree on your expectations for exiting the project in advance.
Cover image: Unsplash
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