8 questions you should ask before investing

Written by Snowball Effect · Published on Mon, 2 November 2020

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So you’re thinking of investing in a high-growth business. Before you make a financial commitment, it’s essential first to do your due diligence and look for answers to any questions you have about the company’s Information Memorandum, financial forecasts, or leadership team.

If you have the opportunity, we recommend participating in an investor event or online webinar so you can have a face-to-face discussion with the company’s founders and leadership team.

Since launching Snowball Effect in 2014, we’ve helped more than 23,000 investors invest in high-growth companies. During that time, we’ve helped companies pull together dozens of Information Memorandums and heard plenty of investor questions. To help make sure that you are asking the right ones, we’ve pulled together eight critical questions that you should ask before investing.

General questions to ask

1. Why is the company raising capital? Is it for growth, or are there other reasons?

The answer to this question will give you an indication of how funds raised will be used and why the company needs the additional money. It could be domestic growth, international expansion, or to repay debt. Make sure you feel confident that the company has a clear plan for the capital they are raising.

Check that the company has clearly identified KPIs that they will use to measure its success. An example of a sales KPI could be that the company will sell a certain number of products to an international market by a certain date. While a company milestone, KPI could be that they will complete the distribution setup of their new company warehouse by a certain date.

2. How big is the company’s market size and how many competitors, or substitute products are there in the market?

We recommend you have a clear understanding of the company’s competitors and whether there is a similar product or service offering already in the market which could hamper the company’s growth. While a business will often have industry competitors, as an investor, you want to know that the company you are backing has a clear point of difference that will give it the best chance of success so that you get the best return on investment.

3. Who else is investing in this capital raise? Are there people who understand the market opportunity well?

If you are a reasonably new investor and don’t know the company’s industry well, then this is an excellent question to ask as it will give you an indication of the quality of investors taking part in the offer. You want to see that people who understand the industry well have confidence in the company’s future growth plans and that they believe this is a promising financial opportunity.

4. Who will be representing my interests on the board?

If a company doesn’t already have an independent director, they will often look for one during the capital raise process. When a company’s board is making decisions and signing things off, it’s essential to have a member on the board who is also thinking about passive investors. What’s best for the company’s founders may not always be what’s best for the investors who don’t have a position on the board. The answer to this question is often included in the investor information pack.

Financial questions to ask

5. Do the company’s financial projections seem reasonable? Or are they forecasting something dramatically different from their past results that are not supported by reasonable assumptions?

As part of your due diligence, review the company’s financial forecasts and match these against their assumptions and past financial results to assess whether their growth projections are reasonable. Take into account past and current global and national events which may affect a company’s growth. If in doubt, seek independent financial advice.

6. Is the company raising enough capital to deliver on their plans, or is there a chance my investment may end up being 'marooned'?

If a company doesn’t initially raise enough cash to deliver on its plans, it can end up being unable to deliver on its financial projections, leaving the company needing to raise additional money to achieve its plans. If a company is only raising enough money to fund the next three or four months, then it could be a risky investment. Ideally, a company wants to raise enough cash to fund the next 12-18 months.

Company leadership questions to ask

7. How capable are the founders, and do they have a good understanding of the industry?

We recommend finding out how involved the founders are in the business, and if they have the experience and skills to manage the ups and downs in a turbulent market. The answer to this question will also reveal how hands-on the founders are or if they lean on a management team to run the day-to-day operations.

8. Who are the company’s leadership team, and do they have the experience to execute their vision?

Having a strong leadership team and board of advisors is critical to a company’s success. As an investor, you want to have peace of mind that the business’ leadership team has the experience and confidence to execute on the strategy and to make tough calls and spot opportunities for growth and expansion.

Find out more about investing through Snowball Effect here, and information on our latest public and private investor offers.

Our team is happy to answer any questions and can be contacted at [email protected] or by calling 0800 SNOWBALL.