Know your VC questions!

If you’re raising money for your company and you are planning to pitch to angel investors or venture capitalists, entrepreneurs need to be prepared in pitching their startup by anticipating the questions they will receive. The failure to have thoughtful and reasonable answers to VC questions will decrease the likelihood of the company getting funded.

You may never get asked these questions, or maybe not as directly as they are asked below, but you should be prepared and have answers to these questions (A – focused on how you see things in general or B) – focused on your start-up and your view of the surrounding factors:

A – Focused on how you see things in general

#1: Who believes in you and how can I get in touch with them?

What the investor is looking for here is who are your mentors and advisers. They like to know that there are people who believe in you, your ideas, your potential, and abilities.

#2: What entrepreneurs do you admire and why?

This is a fun question. Even if you’re not asked this question, work it into your pitch because you can tell a lot about people by who they admire.

#3: How do you track trends in your market?

Investors want to know that you are aware of your industry, as well as where you go to find data to stay on top of industry trends. Things change very quickly today, particularly if you’re in the technology business, so be prepared to share how you find data about your customers and industry, as well as how you apply those findings to your business.

#4: Can you tell me a story about a customer using your product?

This should automatically be included in your pitch presentation anyway. The best pitches are the ones that open with a story about how your product or service is helping your customer. Use real names and be as specific as possible about the “pain” that customer had before they used your product and how you’ve alleviated or addressed that pain. At the end of your presentation, it’s the stories they will remember, so be sure to craft an excellent customer story.

#5: How do you know how much money you need and could you scale your business with less?

All investors, of course, want to know how much money you need to scale your business, but you had better know: (a) what you’re going to spend it on (also called “use of funds”) and (b) whether you could scale your business with less money. If you could scale, how much less funding and what would you be sacrificing as a result? It’s actually a very good idea to have multiple budgets and financial forecasts developed in your business plan so that you can address three different growth models for scaling your business.

#6: How can I connect with 5 customers who have used your product or service?

If investors find your pitch interesting, they will want to begin what’s called the due diligence process. During due diligence they will ask a lot about your customers: who they are, how you know who they are, how you find them, what they think of your product, how they are using it, whether that matches your usage intentions, how you interact with them, etc.

#7: What will your market look like in five years as a result of using your product or service?

This is another opportunity to tell the growth of your company through sharing a compelling story. Paint the picture of your customers’ future as a result of using your product or service for five years. This helps show the investors that you’re able to envision and think critically about how your product and your customer will evolve over time.

#8: What mistakes have you made thus far in this business and what have you learned?

Investors expect business leaders to experience failure. Failure is part of the equation of growth and it’s where all of the great learning’s come from.

#9: What if three or five years down the road we think you’re not the right person to continue running this company—how will you address that?

Often times—particularly with high-growth startups—the founding CEO does not remain the CEO who scales the company beyond the startup phase and investors ask this question to make sure you don’t have “founderitis.” Founderitis is when a founder’s ego gets in the way of the company’s growth and the founder refuses to (or makes it hard to) step down/step out of the position they hold. It’s really good to know what type of entrepreneur you are, as this will make it that much easier to know what you don’t know (another thing investors want to know you know). Knowing these categories gives you a vocabulary to discuss your strengths and your limitations.

It’s important to have people on your team with a combination of the following strengths and abilities. It’s also equally important for you to know where you fit into the mix, know what you don’t know, and be prepared to exit gracefully when the time comes—because it inevitably will.

  • The Idea Generator (You are the visionary, you come up with the great next big idea, your thoughts are not limited by what you hear from your peers, the media, the market, etc.)
  • The Innovator (You can write code, build things, sew things, invent things, and create something for others to sell. Innovators are typically not the same people who sell what they create.)
  • The Starter (You are great at creating a team from nothing and launching a new product or service. You know what it takes to write a solid business plan, implement and track that plan, research and respond to market trends, and surround yourself with people who are smarter than you.)
  • The Changer (You are not only great at being a change agent, but you thrive from doing it. These people make the best “turn-around CEOs” – those who enter an existing company, access the situation, recruit change ambassadors, create a new bold plan, make tough decisions [close a business, fire people, hire people, discontinue a product, etc.], and re-position a company for optimal growth – and even sometimes dissolution.)
  • The Grower (You are what I like to refer to as someone who loves “a diamond in the rough.” You see the potential in people, products and markets, and know whether they are worth investing time, money, and energy into improving. You typically don’t like starting new things; you prefer to take something good that someone else has started and turn it into something great. A talent desperately needed in most companies. This person can take a company from surviving to thriving.)
  • The Exiter (You are someone who knows what it takes to position a company or person for exit. That exit is usually merging with another company, acquiring other companies, or taking a company public. This is a rare skill-set and these people are typically not the starters.)

#10: Have you ever been fired from a job? Tell us about it.

It’s one of those questions that makes people feel uncomfortable, but that’s not the intention of asking it. Rather, it’s to see how you respond to a challenging question, as well as learn more about some challenges you’ve experienced in previous jobs and how you communicate those challenges.

B) – Focused on your start-up and your view of the surrounding factors

Overview

At the beginning of an investor pitch, the venture capitalists will want a clear and concise overview of what the company does, why it should be interesting, and why it would eventually lead to a large exit. So, expect that you will need to cover the following:

  • What does the company do?
  • What is unique about the company?
  • What big problem does it solve?
  • How big is the market opportunity?
  • Where are you headquartered?
  • How big can the company get?

Market

You will need to paint a clear picture that the market opportunity is meaningfully large and growing, so you will receive questions like:

  • What is the actual addressable market?
  • What percentage of the market do you plan to get over what period of time?
  • How did you arrive at the sales of your industry and its growth rate?
  • Why does your company have high growth potential?

Founders & Team

For many investors, the management team is the most important element in deciding whether or not to invest. Entrepreneurs must show they are passionate, dedicated, and have relevant domain experience. So anticipate these questions:

  • Who are the founders and key team members?
  • What relevant domain experience does the team have?
  • What key additions to the team are needed in the short term?
  • Why is the team uniquely capable to execute the company’s business plan?
  • How many employees do you have?
  • What motivates the founders?
  • How do you plan to scale the team in the next 12 months?

Products and Services

The entrepreneur must clearly articulate what the company’s product or service consists of and why it is unique, so expect to get the following questions:

  • Why do users care about your product or service?
  • What are the major product milestones?
  • What is the key differentiated features of your product or service?
  • What have you learned from early versions of the product or service?
  • Provide a demonstration of the product or service.
  • What are the two or three key features you plan to add?

Competition

The company’s competitors will always be an issue and any entrepreneur who responds, “we do not have competitors” will have credibility problems. So make sure to anticipate the following questions:

  • Who are the company’s competitors?
  • What gives your company a competitive advantage?
  • What advantages does your competition have over you?
  • Compared to your competition, how do you compete with respect to price, features, and performance?
  • What are the barriers to entry?

Marketing and Customer Acquisition

The investors want to get a sense of how the company plans to market itself, the cost of acquiring a customer, and the long-term value of a customer. So, be prepared for the following:

  • How does the company market or plan to market its products or services?
  • What is the company’s PR strategy?
  • What is the company’s social media strategy?
  • What is the cost of a customer acquisition?
  • What is the projected lifetime value of a customer?
  • What advertising will you be doing?
  • What are the typical sales cycle between initial customer contact and closing of a sale?

Traction

A company that has gotten early traction in some way will be viewed positively, so be prepared to answer these questions:

  • What early traction has the company gotten (sales, traffic to the company’s website, app downloads, etc., as relevant).
  • How can the early traction be accelerated?
  • What have been the principal reasons for the early traction?

Risks

There inevitably are risks in any business plan, so plan to answer these questions thoughtfully:

  • What do you see are the principal risks to the business?
  • What legal risks do you have?
  • Do you have any regulatory risks?
  • Are there any product liability risks?

End Game

The investors will want to get a sense of when and how they will be able to exit and receive a return on their investment, so they will ask:

  • What is the likely exit – IPO or M&A?
  • When do you see the exit happening?
  • Who will be the likely acquirers?
  • How will valuation of an exit be determined given market comparables?

Intellectual Property

For many companies, their intellectual property will be a key to success. The investors will pay particular attention to the answers to these questions:

  • What key intellectual property does the company have (patents, patents pending, copyrights, trade secrets, trademarks, domain names)?
  • What comfort do you have that the company’s intellectual property does not violate the rights of a third party?
  • How was the company’s intellectual property developed?
  • Would any prior employers of a team member have a potential claim to the company’s intellectual property?

Financials

Any investor will spend time understanding the company’s current financial situation and proposed future burn rate. Be well prepared for these questions:

  • What are the company’s three-year projections?
  • What are the key assumptions underlying your projections?
  • How much equity and debt has the company raised; what is the capitalisation structure?
  • What future equity or debt financing will be necessary?
  • How much of a stock option pool is being set aside for employees?
  • When will the company get to profitability?
  • How much burn will occur until the company gets to profitability?
  • What are your unit economics?
  • What are the factors that limit faster growth?
  • What are the key metrics that the management team focuses on?

Financing Round

The investors will want to get a clear picture of how much is being raised in the financing round and related information as follows:

  • How much is being raised in this round?
  • What is the company’s desired pre-money valuation?
  • Will existing investors participate in the round?
  • What is the planned use of proceeds from this round?
  • What milestones will the financing get you to?

At the end of the day, investors want to invest in leaders who are movers, shakers, creators, and have the ability to inspire others.

You may not have all the answers to these questions however, knowing them is one powerful step to improved preparation, both for you and your start-up.

References:

Cummings, C. (n.d.). The 10 questions I didn’t expect to be asked by investors. B Plans. Retrieved from https://articles.bplans.com/the-10-questions-i-didnt-expect-to-be-asked-by-investors/

Harroch, R. (2013, June). 65 questions venture capitalists will ask start-ups. Forbes. Retrieved from https://www.forbes.com/sites/allbusiness/2013/06/10/65-questions-venture-capitalists-will-ask-startups/#1fca8d377c0d

 

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