How do you know if an investor is right for you?

After putting in an immense effort preparing your business for its fundraise and meeting with potential backers, you’ve finally found an interested investor.

But before you get too excited, take a second and consider a few things.

Ask questions

How can you tell if this is a person you want to do business with and whether them being an investor makes sense for you and your start-up?

You can determine if an investor is right for you by asking questions. Ask any seasoned investor whether they can recall a single instance of a founder asking their reasons for investing. This happens very little and is a mistake on the part of the founder.

How can you possibly know whether a potential investor is a good fit for you if you don't know what matters to them? Ask open-ended, strategic questions that will help you learn what the person's investment style and background is.

What problems do they encounter when determining where to invest, what worries do they have when investing in start-ups, and which sectors and industries do they typically invest in?

With these questions, you can determine whether your possible investor is a suitable match for you and what's essential to them. If it’s obvious you’re not aligned, you may as well let them know it'll be unsuitable for you both. Don't accept the money!

Consider the terms and conditions

Before finalising the deal, it's important to determine if there are any conditions attached to the investment. For instance, they may require a lead investor to be confirmed or only have funds available after a certain date. Ask them what they expect to see in the Term Sheet, which outlines the basics of the investment deal.

You should ask whether they'll demand a board seat, charge management fees, or want a say in certain decisions. Any unusual or unreasonable clauses should be treated as red flags. Proceed with caution.

What's it like to work with the investor?

It's important to ensure you're a good fit for each other and can build a long-term, mutually beneficial relationship. Ask them how their interests align with yours and what value they think they can add to your business. And here's a good one: "What do you think other founders you've worked with would say about you as an investor?" Talk to a few of their portfolio founders to get the inside scoop.

Remember, you're in charge here. Investors are looking for great businesses to back just as much as you're looking for investment. So, if something doesn't feel right, don't be afraid to walk away. Stay cool and keep moving forward with your next investor chat. You're one step closer to finding the right investors to support you and your business.

To learn more about how to prepare for conversations with investors, join the Fundraising Academy.