Insights

The 5 Challenging Questions Entrepreneurs Need To Be Prepared To Answer

Thursday 3 November 2022

When you start looking for funding for your business, you have to be prepared to answer a lot of questions – some of which can feel awkward or uncomfortable if this is the first time you’ve sought investment for a business.

Here at EHE Capital, we know how that can feel, but we also know why it’s so important to ask these challenging questions early in an entrepreneur’s journey to funding.

In the most recent episode of our Extraordinary Entrepreneurs Together podcast, our very own Pete Evison and Elliot Smith joined us to talk about exactly this. At an early stage, we ask the entrepreneurs who approach us the five questions we’re about to share in this blog, not to trip them up, but because these are the questions to which investors will want answers.

By getting these out of the way very early in our process, we can help you find the answers you need and prepare you for facing investors on your journey to finding funding.

1) How much have you put into the business to date?

From an investor’s perspective, this question is all about understanding how you, as the founder of the business, will share the risk with them.

Pete: “Investors want to know what you stand to lose if this business fails. You might have walked away from a well-paid job in the city to set up a startup and not drawn a salary for three years, which is fine and does constitute some risk. But investors want to see financial risks. They want to see money being put into this business, whether that’s the founder’s own money, savings, or money raised from family and friends. Investors want to know the founder has that to lose if they walk away.

It’s a classic shared risk scenario that incentivises founders to go through the hard times as well as the good times. Investors will also want to know what incentives the senior team has to go through those hard times too.”

2) What are your badges and scars?

Many entrepreneurs are more comfortable talking about their successes (badges), but we are more interested in the scars you’ve picked up along the way.

Elliot: “I want to hear about how, when things have gone wrong and the going got tough, you deal with that scenario. Most entrepreneurs have had failures and even businesses which have failed. That’s not necessarily a problem, but there has to be learning from those failures, because they put you in a better place for your next venture.”  

3) What salary are you taking from the business?

We don’t make any apologies for asking this question, but we do understand that it can often feel like quite an uncomfortable topic to discuss.

Elliot: “For entrepreneurs who have come from a corporate environment with well-paid salaries – in some cases six figures – the automatic assumption can be to put a similar amount into their financial model and projections, because they see that as a market value salary for their time and expertise. But an investor doesn’t want their money to fund the founder’s lifestyle, they want to see it invested in the business. They want to see that the entrepreneur is committed and has skin in the game, so to speak.

It’s generally unheard of for founders, particularly in startups, to be on a six-figure salary. It’s normally closer to an average worker’s salary, around the £40,000 mark. In some circumstances, it’s £0 and is pure sweat, but on that basis founders are able to retain more equity because they are seen to be taking more risks. 

Of course there has to be an incentive for that salary to increase over time, but entrepreneurs have got to realise that they’re taking this risk and making this sacrifice as part of the greater good, and that they’re looking to build something that will be worth a substantial amount in the longer term.”

4) How long will this investment sustain you?

We often refer to this as the runway, and ordinarily investors will want to see a 12–18-month runway for the cash they’re investing. 

Pete: “We really drill into this to find out what might put that runway at risk, because the last thing an investor wants is for you to come back, cap in hand, nine months down the line because something happened that you didn’t account for. 

To be honest, we’ve had more cases where we’ve told people they’re not asking for enough! A lot of entrepreneurs try to keep their ask to a bare minimum, and that removes their wiggle room out of their models, which can ring alarm bells for investors. 

The worst thing is you won’t get that feedback from an investor. They will just dismiss you straight away. What we try to do is work with your model, look at how much you’re asking for and advise on whether that’s enough.”

5) How have you valued your business and how would you justify that valuation?

This can be a touchy subject, and it’s one we’ve talked about on a previous episode of the Extraordinary Entrepreneurs Together podcast. However, it’s important that you get this right and are able to justify your numbers to potential investors.

Elliot: “Quite often we see businesses which, in my opinion, are overvalued for where they are at this point in time, but founders have put their blood, sweat and tears into their business and obviously it’s extremely important to them. However, investors will see it from their own risk point of view.

So it’s a balancing act of being respectful of everything the entrepreneur has put in so far, but also ensuring that all parties understand there’s a level of risk, as well as reward, that has to be shared between entrepreneurs and investors. 

The terms of any investment have got to be fair and give the right potential returns for management, investors and key personnel.”

Preparation is key

Our process at EHE Capital is designed to help entrepreneurs through the investment process. While these might feel like awkward questions, they are really important to answer as early on as possible. We ask them with the best of intentions, and we use the answers to help each entrepreneur build a stronger pitch to take to investors. 

If you’d like to know more about the advice and guidance we provide throughout the process of seeking investment, drop us a line. We also have an extensive and supportive community of entrepreneurs who are going through, or have been through, the investment process and who are always happy to share their experiences.

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