Cameron Chell here again.

Last time, we talked about how to find the action-oriented founders who are willing to do whatever it takes to get the job done.

Not every founder is this action oriented, and as investors, it’s our job to pick the winners out of the bunch.

Today, I want to talk about another characteristic that even the strongest founding teams may lack: transparency.

As investors, we tend to have an expectation of transparency from a startup’s founding team.

But here’s the thing. Not everything is going to be transparent.

Every single management team will always have their best foot forward. This isn’t a matter of a team’s integrity… but more often than not, their discretion.

This proper discretion is the key to a team closing sales, attracting the right talent, and getting financed.

As an investor, if you think your startup doesn’t have problems just because management is not highlighting them, you’re being naïve.

Every startup – just like every other enterprise – always has crazy challenges. Things are never quite what they seem, and that’s to be expected.

In fact, if a startup doesn’t have problems, it’s not going to be successful.

If your startup is not pushing the envelope, it’s not going to be disruptive.

And if your startup isn’t disruptive, it’s not going to have the opportunity for a large valuation.

However, as angel investors, it’s crucial that we understand the difference between problems that propel a startup’s growth and problems that could drag a startup down.

The trick lies in reading between the lines, asking the right questions of the founding team, and focusing on the right details to dig into what’s really going on underneath the surface.

Now, there are four key areas I like to focus on in terms of being able to understand what’s happening inside of a startup: sales, product, talent, and finance.

And while each one of those is extremely important, sales is the one area I emphasize more than any other.

By focusing your questions on sales, you’ll actually hit every other part of the business.

Now, nine times out of 10, the managing team will want to talk about anything else but sales. Either that, or they’ll very quickly revert into why sales aren’t happening…

  • The product isn’t ready…
  • There’s an upgrade coming…
  • Pricing is still being worked out…
  • The market is tough…
  • Competition is fierce…
  • And so on.
Remember, as an angel investor, your return potential comes down to where the company is at in getting the product sold to customers.

If a company isn’t making money, chances are, you won’t either.

That’s why it’s important to get all of the sales-related information you can before investing in a company. Here are a few questions that I like to ask…

  1. Who are the top three customers that we are implementing with right now?
When you ask this question, the founding team may tell you that they’re not implementing with any because they’re still finishing the product. Your response to that should be, “What customers are you working with to start implementing that product?”

  1. Why did those customers like or want our product?
In other words, you need to figure out if there’s a real market demand for this company’s product.

  1. Is the customer paying? What are the price points?
This question will give you some really great context from the founder or the management team. You’ll learn a ton about how much time they’ve actually spent with the customer and on their pricing strategy. You’ll also learn if there’s an actual market fit for this product.

This is just a sampling of the questions you should be asking a founding team before you invest. But the long and short is that by asking these simple questions, you’ll get information about everything else within the business.

You’ll hear about how the company doesn’t have enough money to get the product done on time… or how they have to go through another financing round to bring on a particular customer or get a new product version done.

You’ll hear about how the team may need to recruit additional talent, or how they’ve just lost some talent. You could even hear about how they have the very best talent, or how they’re on track for success.

And of course, you’ll hear about the product specifically, what customers are saying about the product, and why things are either happening slowly or much faster than expected.

In other words, always bring your questioning back to sales, and everything else will come out of the woodwork.

By asking sales-related questions, you can make sure you’re putting your money in the right spot… before you even invest a penny.

However, there’s a huge difference between asking the right questions and asking too many questions.

Next time, I want to talk about exactly how to toe that line, and what strategies you can use to make sure you’re adding real value to your portfolio companies.

Have a great rest of your holiday weekend, and I’ll be back soon with another update.

Talk soon,

Cameron Chell