February 28, 2017
Fundraising is a complicated, and at times, confusing process. To fundraise effectively, you need to have a strategy, understand different types of investors, know how much to raise, and create an investor pipeline. And while all of this is integral to an effective funding round, asking the right questions can go a long way in setting yourself up for success.
Below, we discuss the typical questions you will hear from investors and discuss how you might go about answering them:
1. Who are your customers, and what problem are you solving for them?
Investors are looking for a simple and clear answer of who you are selling to. They're also looking to understand how clearly you know the pain point, and how big of a problem it is for the customers. This question also opens up a conversation about founder-market-fit, as well as helps investors think about the size of the opportunity.
2. What is unique about your solution? What is your unique insight?
Investors want to understand how you are proposing to solve the problem, but more importantly, they're looking to see if you have unique insight. Has anyone else thought about this before? How is it different from other solutions? Do you have a secret? Seriously, investors want to know this because the more differentiated you are, the more defensible the business might become in the future.
3. How does your product actually work?
Investors naturally want to see the demo of your product, because a demo is worth 1,000 words. A lot of investors want to fund product-obsessed founders – founders who get lost in details of the product, who are super thoughtful and nerdy about features they built, and really understand customer needs. Always show your product to investors and make the demo awesome.
4. What are your KPIs? How do you measure growth? How do you know you have product market fit?
What numbers do you use to drive the business? Lack of clarity or hesitation is a major red flag for investors. If you aren’t clear about your metrics, investors won’t believe that you can grow the business. Investors want to make sure you understand and measure your conversion and sales funnels, activation, retention, magic moment, churn, CAC, LTV, etc.
5. What is your traction to date?
The question of traction is really two-fold. First, investors are literally asking what is your traction. Second, and more important, how do you define traction? Many founders mistake progress or effort for traction. On the other hand, investors think of traction as revenue and paying customers or significant growth in weekly and monthly active users.
6. What is the size of this opportunity/total addressable market?
How big is your market is a question that matters to a lot of investors. Why? Because VCs economics force them to only focus on very large markets. VCs look for big markets with lots of money so that, when they own 20 percent of your business, they get a meaningful amount to return all or a portion of their fund when you exit. Otherwise, they don’t make money.
7. What are your CAC and LTV?
In the early days, founders are expected to know the terms and have an idea of what the numbers are. The cost of user acquisition conversation leads to the conversation about channels, marketing and advertising spend. If you are B2B company with direct sales, you will talk about cost of sales and how it will change at scale. Life-time value of the customer is equally important. How long does it take to pay back the amount it cost to acquire this customer? How much money will you make on the average customer?
8. What is your business model?
Naturally, investors want to understand how you make money. They want to know who your customers are and how are you planning to charge them. This question combines not just pricing, but strategy and tactics as well. If you make money indirectly, via advertising, they would then focus on how your acquire customers.
9. How did you come up with your pricing?
This is probably a less common question in the early stage, but it is an important one. Investors are looking for you to demonstrate that you’ve done customer research and competitor research. They are also looking for you to acknowledge that you are early and the pricing is likely to change.
10. What are your unit economics?
Unit economics give an inductive case for your business. For example, for Uber, a unit would be either one ride or one driver, depending on how you model it. The key thing in unit economics analysis is to capture all associated costs and revenues and then see if you are actually making money. Some startups have poor unit economics initially and say they will optimize costs later.
11. What is your go to market strategy?
The go-to market strategy question is a really important one and is often misunderstood. Investors ask this typically when founders say that their product works for everyone. Investors are skeptical, as experience says that focusing on a vertical or a segment is typically better. For example, if you are building developer tools, you could initially focus on freelancers and individual developers. Then once the product is solid, you can move upstream to mid and large enterprises. Tesla had the opposite strategy. It first made a high end car and has been moving downstream.
12. What are your customer acquisition and distribution channels?
How are you planning to acquire customers? In the consumer world, you have paid and unpaid means. You can advertise or you can use content marketing, social channels and word of mouth. Investors want to understand how deeply you understand your channels.
13. Why now?
This is a question that often goes unasked, but is certainly on the investors mind. Timing is everything, and really understanding why now is the time for your company to win is important. The VC industry is full of examples when something was too early or too late, and as a result, it didn’t work or didn’t get as big.
14. Why you? What is your founder market fit?
Investors don’t want to fund accidental founders. They want to fund people with deep domain expertise, massive vision, and passion. Investors want to get to the bottom of why you started the business – do you have unique insight and unfair advantage?
15. Where did you grow up? Where did you go to school and work?
In addition to understanding if you know the space, investors want to understand if you are resilient and smart. The question about where you grew up is really a question about how hard you have had to fight through your life to get to where you are. There are no hard and fast rules of course, but the environment you grow up in often defines your level of resilience. When things get difficult, and they always do, will you walk away? When you get knocked down, will you get back up?
16. How did you meet your co-founders?
This is another interesting question that doesn’t have a clear cut right answer, but is telling to investors. If you say you met at a hackathon 3 months ago, what you're saying is that you don’t really know each other well. Investors may think that the connection between you and your co-founders isn’t solid. If you are saying that you’ve been friends since high school, investors know that you trust each other.
17. Who are your competitors and how are you different?
It's always important to think about competition. Investors are looking to understand how knowledgable you are about competitors and what is different about you. If you say you don’t have competition or if you bad mouth them, it's a red flag. Simply acknowledge competitors, and highlight what they are doing well. Explain how you are different and why.
18. What is your vision?
Some founders stumble on this question and this is a red flag for investors, particularly for VCs who want to back founders with big vision. What do you want your company to be in 10 years? This question reveals not only how you think about the business long term, but whether you plan for it to exist a decade or more. If your plan is to sell quick, you won’t have a broad long term vision.
19. What milestones will you achieve with this financing?
This topic is complex and founders often approach it with a naiveté. A typical answer might be expressed in terms of specific product milestones and scaling of the team. This is not what investors are looking for. They want to understand tangible business milestones you will reach with the capital you are given.
20. How much will you be burning per month?
This is a pretty straightforward question that follows from your financial model. A few things to pay attention too: first, your HR costs should roughly be 70K-100K per head. Second, investors will look for clarity around advertising spend — in the early days, before strong product market fit you should not me spending a lot of money to acquire customers. And lastly, investors will look for any outliers, anything that jumps out as out of ordinary or unusual.
21. What will be your MoM growth in customers and revenue?
As a startup, you need to make a growth assumption. The trick is that you don’t have a ton of historical data to back it up. Whatever data you do have, include it in the model and explain it, because it helps establish credibility.
22. When will you be profitable?
Historically, many of the best startups have reinvested their revenues into the business and sacrificed profitability in favor of growth. Since the financing market has become tighter, profitability is fashionable again. Becoming profitable is important for many reasons, but the main one is that it allows you to become self sufficient and control your destiny. When you are profitable, you are no longer in need of external capital in order to survive.
23. Why is your business defensible?
VCs want to know what happens to your business over time. Assuming you can get a lift off, investors want to know what happens year 5, year 10, etc. Why? Because this is a typical horizon over which more successful startups go public or get acquired for a significant return. Long-term defensibility is difficult to predict. That’s why many investors look for natural monopolies, winner take all markets and businesses with network effects.
24. What is your intellectual property?
If you are startup that is creating a new technology, investors want to know about your IP. Are there things here that can be patented? What is the true innovation in your business? While software patents haven’t been effective in recent years, depending on the type of your business and depending on what kind of investors you are talking to, IP can be an important topic.
25. What is your tech stack?
This question will be particularly relevant for startups that are working in AI, VR, dev tools and other areas that require deep tech. Some investors, particularly technical ones, will want to nerd out with you on your stack.
26. What are the key risks in your business?
This is one of the hardest questions investors will ask you – why might you fail? This question is a probe for how you think about risks in your business, whether or not you acknowledge risks and if you're self-aware and intellectually honest. Great founders bring up and face risks head on. They don’t try to shove them under the rug and ignore them.
27. Who is the natural acquirer for your business?
Investors aren’t likely to ask you this question, but they will certainly think about it. Investors are putting money into your business to make more money, and historically, since the IPO market is tight, most successful companies are acquired. Although you have no plan to sell your company, it's good to think about who might bite in the future and why.
28. How much capital did you raise so far and on what terms?
This is a simple question – just tell investors exactly how much you raised, whether you did it on the note or via equity. Don’t stumble or hesitate, because that would be a red flag.
29. Who are your existing investors?
This is another straightforward question. Let them know who your existing investors are without hesitating to create confidence in you and your potential investors.
30. How much capital are you raising and what are the terms?
You should be clear on how much you are raising based on the financial model. Depending on where you are in the fundraising process, you may not have the terms set yet. If you don’t have the terms set, then just say so – investors will completely understand.
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