"How much money did you invest yourself?" said the investor.
Sometimes investors will ask a question you weren't expecting, like this one. No matter what it tells you about the investor, you need to provide a convincing answer. Here's how to answer this one.
This might ruffle a few feathers, but here's what this question probably means, and how to answer it.
Founders, if an investor asks how much of your own money you've invested in your startup, it tells you:
- They probably have very little experience in startups; and
- They're probably not someone you want owning a piece of your company.
Here's why.
Startup founders are already "all in"
Startup founders risk everything - from reputation, to lost career opportunities, potential financial ruin, relationships, and their own health and wellbeing. If that's not enough to convince an investor they're committed, the founder shouldn't take their money.
When our co-founder, James Green, mentioned this issue on LinkedIn, a founder in his network pointed out the true opportunity cost:
Indeed, this is often overlooked. We know of another founder this applies to. Before launching their startup, they were earning several hundred thousand dollars per year at SAP. 10 years later, they're still on a meagre startup salary. That equates to a cash investment of more than $2m, and counting, and there's still no guarantee there will be an exit.
Who'd be a founder?!
Founders with too much at risk make mistakes
Another issue is that founders who have too much on the line can themselves become a risk. As in investor, do you really want to put your money into a venture where the founder has literally everything at stake?
To maximise their chances of a return, investors must back founders who apply good judgement. Judgetment, however is negatively impacted by emotions like stress and fear. These can lead to poor decision-making, or can even create misalignment between the interests of the company, the founder, and the shareholders. These are good for nobody.
Raising money is a core founder skill
Also don't forget, if a founder has managed to raise pre-seed money, that's a good thing. The ability to tell a convincing story, and bring investors (not to mention employees) on the journey with them is a critical skill. If they've done that rather than invest their own life savings, maybe they're as capable as they are sensible.
Other people's money is more precious than your own
Moreover, if the founder has raised investment pre-launch, it probably came from friends and family. Trust me on this, they're going to feel ten times worse if they lose that money than if they lose their own.
Other people's money is a form of validation
A founder's willingness to invest their own life savings in their idea shows massive belief in the idea, but it's still just one data point. If that founder has raised external capital, it shows you, as an investor, that this idea has appealed to more people than just you and the founder. It's not necessarily a sign that this is a great business (it could just show that the founder is a good salesperson), but it is its own form of validation.
No two founders are alike
Last but not least, every founder's financial situation is unique. They may be poor, or they may have a $20m trust fund. The amount of cash they've personally committed to their business is absolutely arbitrary, and unless the investor knows their personal circumstances, it's meaningless.
What do you say if someone asks it?
As I've said above, there are many reasons why this isn't a good question, but that doesn't mean investors won't ask it. Whether or not this is someone you want on your cap table, you want to be able to answer the question.
How NOT to answer
Whatever you do, please don't say the following:
"I've invested nothing because I don't have any money."
To investors, that's a big red flag, if not an instant pass. Investors aren't looking for people who put hundreds of thousands of their own money into a project, but they do want to see a) evidence of your commitment, and b) some progress. One way or another, you need to have validated your idea. That means focus groups, interviews, market research, building a waiting list, testing some marketing channels, etc. They will want to see evidence of the time and effort you've invested. Do you have a company? Have you bought the domain name? Have you written any content? Have you created any formal company documentation, like shareholder or founder agreements, or employment contracts? If not, what have you done?
If you haven't done the basics, investors will pigeonhole you along with the thousands of other hopeless founders who have had an idea then instantly tried to raise money. Unless they're extremely lucky or well connected, these people never raise money.
What to say if someone asks
A far more compelling answer is to explain what you've achieved and demonstrate that you're ready for investment. You've done everything in your power to convince yourself, and others, that this business will be a success. You've validated the idea, you have customers/users lined up, you own your IP, you have a company and name, you have advisors in place, you've signed LOIs with partners and corporate clients, and you've committed as much of your own time and money as you're comfortable to do.
As a wise man once taught me:
There is no right time to start a business, but there is a right time to ask others to fund it, and that time is when you can prove that you're ready.
Good luck with your raise.
Image credits
– Title image by Mohamed Hassan.
– Poker chips by Anna Shvets.
– Ice cream by Sarah Kilian.
– Money bike by Mohamed Hassan.
– Little bird by Elijah O'Donnell.
– OK sign by Rocketmann.
– Twin sheep by Jørgen Håland.