7 Commonly-Asked

Questions by Angel
Investors
29th April 2020

This is a guest post by Paul Stricker, Head of Venture

Capital at Smith & Williamson, sharing his insight into
Angel Investors. Smith and Williamson are the only
professional services firm offering wealth management
and accounting services to both investors and fast-
growing businesses, including the Seedrs’ portfolio.

Bringing in outside investors is always a challenge for an

entrepreneur. Having built the business on a good idea
and hard work, outside investors demand financial
projections, evidence of traction and a clear indication of
how their money will be spent. Most of this is part and
parcel of good business practice, but it is worth
understanding the questions investors are likely to ask,
and why they’re asking them, so there are no nasty
surprises. Head of Venture Capital at Smith & Williamson

1. What’s your unique selling point?

Investors, especially VCs, typically want to back winners,

rather than ‘me too’ companies. First and foremost, you
need to be clear on what is different about your business,
why no-one else is doing it and why it’s defensible. That
also means being clear about your addressable market.
How big could you be? How easy it is to get to where you
want to go?

2. What is your cash burn rate/runway?

Running out of cash is one of the top reasons for

businesses failing. Even profitable businesses can fail if
cash is not managed properly. Investors will want to be
sure founders understand this and have good control of
their costs. ‘Burn rate’ can be either gross (how much
cash a company is spending) or net (spending with
revenues added back i.e. how much cash a company is
losing). ‘Runway’ is the amount of time until the business
runs out of money, assuming the current income and
expenses stay constant. It is a straightforward calculation
that divides the current cash position by the monthly
losses.

There’s no correct burn rate but investors will want to

check the amount being raised can last until the business
is profitable, or at least until the next fundraise. Raising
funding takes time and is a distraction from the day to
day running of the business. If you are raising £100,000,
but are burning through £50,000 of cash a month, that
would be a problem. The business needs enough cash to
get to its next milestone. Eighteen months’ runway is a
good rule of thumb. They will look mostly at net burn if a
business has strong recurring revenues with low churn
rates. If revenues are lumpy or risky, gross burn becomes
more important and understanding which costs could be
cut if things don’t go to plan.

3. What is your ambition for the business?

Investors want to find those companies that match their

goals. Angel investors may not be looking for the same
type of return as venture capitalists. An angel investor
may want to turn £100,000 into £1m, while a venture
capitalist is looking to create a ‘unicorn’ (unlisted
companies with a valuation of $1bn+). It may be your
ambition to create the largest possible business – and
you may believe you have the addressable market to do it
– but this is not the goal of every founder. Some may
want to create a business they can pass on to their
families, or a cash-generative business to provide them
with an income. There will be investors who share these
goals, but for a harmonious partnership, the two need to
match.

4. What is your personal motivation for running the

business?

Investors need to understand why you’re there and what

you hope to achieve. They need to see that you are
passionate about the business and why. That means
showing you are fully committed, rather than it being a
sideline. They are likely to want to see that you have ‘skin
in the game’, with your own money at risk in the business.
That said, they will also want to see that you are
remunerated appropriately. They don’t want you to be
forced to abandon the business or be unable to sleep at
night because you can’t support yourself or your family.

5. What is the quality and experience of the team you

have built?

With early-stage companies, most investors see the team

as more important than the business plan. Businesses
rarely go entirely to plan and often need to pivot if the
first idea doesn’t work as well as hoped. It is the quality
and commitment of the team that will determine success
or failure. The founder needs to ensure that the team is
motivated and shares the vision of the business.
Investors will also look at the type of people you have
managed to attract and how much you are paying for
them. If you have managed to attract some heavy hitters,
who are willing to work in the business for a chunk of
equity rather than a high salary, that says good things
about the business.

6. How will you use the proceeds of your fundraising?

Too often business owners are vague about the purposes

for which they are raising money. They will give a loose
split – 10% to technology and 20% to marketing, for
example. This implies that the business owner doesn’t
really understand how much they need to raise and why;
they just feel like they could use a little extra cash in the
business. You need to be far more specific in how cash
will be allocated across the business. How much do you
need to deliver your forecasts? What will it cost to build
this individual bit of technology? What will that piece of
technology allow you to do? How much will you need to
spend on marketing to bring a new product to market? At
each point, you need to have a detailed idea of how much
it will cost. It’s fine to have a bit of contingency, but
investors don’t want to fund ‘a strong balance sheet’ or a
war-chest for undefined M&A opportunities.
7. What are your gross margins?

Any investors will want to know that your business can

scale effectively. Gross margins are an important
indicator of how this will happen and whether or not the
business is profitable at scale. Fixed costs are high as a
proportion of revenues in the early stages of a business
so investors will want to ensure that this improves as the
business scales up which is why they will focus on the
unit economics. Investors will want to drill into
contribution margin, which includes marketing, sales and
customer services costs to understand which costs are
truly fixed and which scale with the business. They will
also want to know about working capital requirements
and cash flow timings because this will influence how
quickly the business can grow and how much funding it
will need to do so.

Inevitably, this only looks at one side. When you take in

outside investment, you are relinquishing some of your
autonomy and you need to ensure that you can work
effectively with your investment partner. At some point,
things will go wrong and you will need to have
uncomfortable phone-calls with them. It helps if you have
a good working relationship, the same goals and can
communicate with each other effectively. The right
partnership should be mutually supportive and focused
on building a strong and resilient business for the long
term.
Looking for more information on how to prepare yourself
for angel investors? Read our guide on How To Find Angel
Investors.

Disclaimer

By necessity, this briefing can only provide a short

overview and it is essential to seek professional advice
before applying the contents of this article. No
responsibility can be taken for any loss arising from
action taken or refrained from on the basis of this
publication. Details correct at time of writing as at March
2019.

Smith & Williamson LLP. Regulated by the Institute of

Chartered Accountants in England and Wales for a range
of investment business activities. A member of Nexia
International. Smith & Williamson Corporate Finance
Limited Authorised and regulated by the Financial
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