5 Important Questions to Ask Potential Investors for Your Small Business
Updated: Jan 10, 2022
In the small business world, seeking out investors isn’t exactly like Shark Tank, where investors mercilessly grill you for information about your company. Instead, it’s more of a give-and-take, where you get to be the one asking the questions.
After all, an investment is a relationship - you want to know that by entering this partnership you’re making the right decision for your small business, and the investor wants assurance that they’re making a good choice by investing in you. Once you’ve found potential investors, having several questions in mind to ask them will allow you to best decide on the fit for your business so you can start building on a prosperous relationship with your investors.
Here’s what we’re going to cover:
How hands-on or off the investor intends to be with your business
The investor’s most successful investment (and definition of success)
Questioning how you’re going to raise capital for your small business? We’ve got an answer!
Small businesses from dry cleaners to local food delivery businesses have crowdfunded on Honeycomb and connected with investors in their own community to grow their business. Learn more about how Honeycomb crowdfunded small business loans can grow your business, and sign up below for more information!
1. What is the investor’s experience with investing in small businesses?
The first question to ask an investor is about their previous experience in investing in small businesses. While the premise of investing in small businesses is similar to investing in another industry - the goal being to put money into a business to see a return - the expectations of return will be different for a small business than, say, a unicorn tech company.
You can also ask potential investors what their motivations are for investing in your business. Obviously, they’d like to see a return on their investment, but people also invest for reasons that aren’t financially-motivated. Do they have an interest in your industry (more on that later), or do they just want to see a Main Street business flourish? Are they looking for an investment that will help build up their community, and they think you’re a part of that process?
Another question to ask investors on the subject of their past experience is how they are planning to see out potentially difficult times for your business. Some investors who are purely in it for profit might dip out when the going gets rough, as soon as they can withdraw their support. Others, and usually those who are both financially and emotionally invested in the success of the business, will stick around through tough times.
As the past year and a half has taught us all, nothing is predictable for small businesses, so having a solid foundation for your investor relationships and knowing about their history can be valuable information.
This is also a reason why we ask about the investor’s history - you don’t have to take their word for it, do your own research on how your potential investors have treated other business owners in the past as well!
2. What are the investor’s goals with this investment?
Here is a more numbers-focused question you can ask a potential investor. What kind of return are they expecting to see on their investment, and is that manageable for your small business? Are they investing with more emphasis on wealth-building, or on building relationships with small business owners?
This is also an opportune time to ask the investor whether they’re interested in investing in a debt capacity or for equity. Not only does it give you more basis on what the nature of this investment relationship will be, but it gives you an idea of how involved they are going to want to be in your operations.
The debt vs. equity debate is common for small business owners, from breweries to restaurants to anyone else seeking out capital from investors. On one hand, seeking out equity investors can be helpful because it gives you opportunities for partnership and to get large amounts of capital at once. However, you also might have to give up profit and ownership.
On the other hand, with debt investment, you’re going to be, well, indebted to your investors. That doesn’t necessarily mean it’s a bad thing, but it’s something to consider if you don’t think you’re in a good enough position to take on debt and be able to consistently pay it off.
3. Does the investor have industry experience and connections?
One reason why you might want to seek out investors rather than other lenders like a bank might be because you want the added benefit of working with someone who actually has experience in the industry.
While some investors are more of hobbyists interested in financially being a part of your industry but lacking the credentials to back them up, you also can find investors who are part of your industry (or adjacent to it) and who want to help you grow.
For example, Western Reserve Distillers, who ran a crowdfunding campaign with Honeycomb Credit in 2021, found an investor in Arrowwood Wholesale, a spirits distributor who’d already been working with them for months. This investor, as well as 56 others, helped Western Reserve raise $100,000 to expand their whiskey inventory and build upon their aged agave spirits program.
Kevin and Ann Thomas of Western Reserve Distillers’ Honeycomb campaign helped them raise capital, meet investors, and build up marketing buzz for their growing distillery!
As you can see, having industry experience is a useful thing to look for in an investor, because they’ll have insight on your business’s place in the market. Furthermore, industry investors want to see your business succeed, because it could mean potential gains for their own business, like what we saw with Western Reserve Distillers. We discussed these different kinds of investors, from industry insiders to hobbyists to small business enthusiasts in further detail in this post on finding investors for a craft brewery.
4. Will the investor be more hands-on or let you conduct business on your own?
As we alluded to in our discussion on debt vs. equity investing, the nature of your investment relationship can have an impact on the operations of your business.
If your investor is an industry veteran, you might want to let them have more of a say in the operations - they probably have some pretty sound business advice. They can connect you to suppliers and distributors you might need an introduction to, they can keep an eye on industry trends and steer you in the right direction, and so forth.
However, if your operating style is a little more individualistic, you might not want this kind of a relationship with your investor. In that case, one who’s less interested in the day-to-day of your business would probably be the better bet. Here, it just comes down to personality, and how much control you’re willing to relinquish to an investor, if any.
5. What have been the investor’s most successful investments?
While this goes along with our first question on the investor’s past experience with investing in small businesses, hearing about the investor’s successes is important enough to warrant its own point.
It makes sense that you’d want to partner up with an investor with a proven track record of helping to grow small businesses. This success could be because they make astute decisions based on your business and your projections for the future, or because they take a closer relationship with your business through the investment that will benefit you.
Also, asking an investor what they think their most successful investment has been to date can be useful because it allows you to see how exactly the investor gauges success. Are they more proud of the increased revenue of the business they invested in? The relationship they built with the owners? The way the business built up a reputation in their community as a result of their investment? Knowing this can help you align with investors who share your idea of success for your small business.
What if I want to spread the investment around, and I want to keep ownership?
If after going through all these questions, you’re wondering if an investor relationship is right for you, that’s okay!
What if we told you there is a different kind of investor out there, who wants to invest in your business, but doesn’t necessarily need to be involved as much as a typical investor might want to be? What if we also told you that there are thousands of them out there, and some of them could already be your most loyal customers?
This is where Regulation Crowdfunding, or Reg CF, comes in. Running a regulation crowdfunding campaign is kind of like having a massive friends and family round, where people can invest as little as $100 in your business. It only recently became legal, thanks to the 2017 JOBS Act, which allowed unaccredited investors to invest in small businesses. Plus, this kind of crowdfunding can be either equity or debt, so you can decide how you want to take in capital and distribute the returns.
Honeycomb does Regulation Crowdfunding for small business loans, so it’s a kind of debt investment. However, there are so many benefits to crowdfunding a small business loan over just accessing the capital.
Investors in crowdfunding campaigns want a return, but they’re also excited about you as a business, meaning they’re going to want to support you and tell their friends about you as well. This generates buzz for your business, leading to on average a 60% year-over-year increase in revenue for successful Honeycomb campaigns!