The right questions to ask investors when fundraising in a down market

With rumblings of a recession and ongoing market uncertainty, fundraising in the current environment may feel especially daunting.

For both first-time and experienced founders, a proper fundraising toolkit can make or break a successful round — even more so in a down market. So what are those tools? I’m a firm believer in the value of data-driven storytelling when it comes to pitching your company to potential investors. Another essential factor is a strong understanding of your company’s capital needs and the ability to build the financial model to get you there.

While crunching the numbers is an important part of the process, we can’t overlook that pitching an investor is really about looking for a strong connection with a partner — someone who understands and believes in your business and is the strategic choice to bring your company to its next stage of growth. Knowing which questions to ask in the limited time you have with an investor can be challenging, especially when the current environment has led some investors to tighten their belts.

However, many investors still have capital available to deploy despite the downturn. Here’s what I tell founders to ask to make the most out of their fundraising meetings and identify the right investment partners for their companies’ future.

Core questions for every investor meeting

A downturn doesn’t necessarily mean that all investors are shutting their doors; yes, some may choose to take a more conservative approach for the time being, but when meeting with investors who are still active in the market, not much needs to change about your usual pitch.

Some fundamentals stay the same: Engage in a conversation and be prepared to back up your story with strong metrics. In fact, the more a founder can push the questions back to the investor in a way that gives a better understanding of their business and investment strategy, the easier the rest of the conversation will be. Some helpful questions to get there with investors are:

Tell me about your firm and how you operate. Are you generalists or sector specialists?

If they are generalists investing in early-stage companies, this often means they rely on their network for due diligence and deal sourcing — which can make it more difficult to secure funding if you did not come in via the network. If that’s the case, try to get them to map out their network; connecting with their portfolio companies can help secure that “in” down the line.

Late-stage generalists rely heavily on financial modeling — these are the folks who will most likely closely scrutinize your data. For a successful meeting and to continue the conversation, be prepared to speak to your financial data fluently. The investors won’t be experts in the space, as they would be if they were specialists, but they will look at the data to understand your company’s potential.

With specialists, they’ll either know your space well or they won’t. Depending on what you are looking for in a partner, the more cues they give on their understanding of your business, the easier it will be to determine if they are a match.

What are the most important growth metrics you and your team want to see when deploying capital?

Here, you’ll likely hear investors answer with something related to the LTV/CAC ratio, as lifetime value (LTV) and customer acquisition cost (CAC) are two of the most common metrics used by investors and companies to provide a cost-benefit analysis and ultimately predict a company’s value and potential. Ahead of your meeting, ensure that your company’s data shows that the short-term investments into sales and marketing are creating value. This indicates to investors that additional capital will help the business scale efficiently.

Investors will especially pay attention to this metric in a downturn to evaluate whether a business is strategically adapting to the macro environment. For example, investors would expect CAC to go down as companies tend to cut back on marketing spending during a down market. Alternatively, displaying a high CAC alongside plummeting LTV would signal the company is not well positioned to grow in any environment, let alone a downturn.

Beyond funding, what would your portfolio companies say it’s like to work with you?

Questions like this are essential in uncovering more details about the potential partner’s working style with portfolio companies, and the response will give you a sense of whether they’re the right partner for growth.

What you’re really getting at here is an understanding of how hands-on that investor will be. Are they an expert in the space who will be keen to give counsel at every turn? Or are they more passive and willing to trust the leadership team’s decision-making after writing a check?

While there is no right or wrong answer, most investors will fall into one of those two categories (with some overlap, of course) — so it’s important to know upfront what to expect from the relationship.

Since the goal of a question like this is to get at the more behavioral dynamics of the partnership, don’t forget the critical step of contacting other companies in that investor’s portfolio. While you’re asking investors to share what they think is the point of view of their portfolio companies, portfolio founders and CEOs should also verify that information directly to get a full picture.

What to listen for

Remember, fundraising is a two-way conversation, so in addition to asking the right questions throughout, listen closely for important signals to take the conversation forward. One main rule of thumb: Any time an investor mentions a specific number tied to fund size, that’s your entry point to understanding more about the check size they need to invest. I always tell founders to engage further. For example, “You mentioned your total fund size is $500 million. How many investments would that be?”

This is a pivotal moment in the conversation because it allows you, the founder, to determine the typical dollar amount the firm is putting into each investment. Twenty investments in a $500 million fund means $25 million per deal. This is typically half in a first check and half in “reserves,” which are investments earmarked to future rounds.

The pitch meeting is intended to help you identify the right partner — not just any partner – so keep your company’s fundraising needs top of mind. It’s tempting to abandon what you know is best for your company when presented with an offer, especially in a turbulent funding environment, but staying true to your proven success path will pay dividends in the long run.

Navigating the conversation in a tight funding market

It’s reasonable to wonder if the down market is changing the types of questions you should ask potential investors when fundraising. After all, the fundraising dynamics are certainly different than they were in 2021, when we saw VC-backed businesses raise a record $330 billion. But with massive amounts of dry powder still on hand, investors are still looking to fund-promising companies, even if the current slowdown is leading to a longer process. To identify where these folks are, I tell founders to ask questions like, “How are you thinking about the current market environment?”

Listen closely to how they respond, as there are several indicators for how that investor is approaching the downturn, whether they are actively investing and how that will impact your pitch. If an investor says that they are “very focused on advising portfolio companies for the next six months” or “led a few inside rounds,” that’s a good indication that they are not actively investing. While it may not be what you want to hear, there is still significant opportunity in the meeting.

Remember that the goal of an initial meeting is to gather information. Questions like: “Can you help me understand your investment strategy?” or “How does the investment period typically work for these companies?” can uncover helpful hints for determining the next window of fundraising opportunity and more details on whether this investor would be a strong long-term partner for your business.

For example, have they mentioned that they will be investing in your industry over the next five years? While they may have indicated they are pausing new investments for the next few months, there is still capital to deploy and knowing how your company is positioned in the eyes of that investor is a major factor in building and continuing the relationship (even without an investment).

And while there are do’s, there certainly are don’ts as well. Even if there is not an immediate fundraising opportunity, use the time to register genuine interest in their fund and learn from the conversation.

The best-case scenario is that you will form a new relationship that can turn into a partnership when the time is right. The worst-case scenario is to pigeonhole yourself into a permanent “no” in the investor’s mind. Avoid statements like, “So you aren’t investing right now, but let me send you my data anyway.” This indicates that you weren’t really listening to what they said and often shuts the door to future opportunities.

Don’t be discouraged

Above all, don’t be discouraged by the current market outlook. Just as individual investors cannot “time” the market, founders and institutional investors alike should not “play the cycle.” Conversations on the right versus wrong time to fundraise or invest will always be trending, especially when there is volatility in the public markets.

But founders should take comfort in the fact that the job of investors is to provide the liquidity that the market is not providing, and the good ones are guided by strong fundamental analysis to do so.

Now and always, the key to success is finding long-term capital partners that will guide your company forward through effective execution — not market timing.