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15 Questions Venture Capitalists Will Ask You Before Investing in Your Startup

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Investor pitch

Venture Capitalists (VCs) conduct in-depth research before investing in any new startup business. In most instances, these investors will give a no for various reasons. One common reason for such a response is when the startup falls outside their focus or not within its desired investment stage.

Therefore, VCs will invest in companies within their investment parameters and when satisfied with answers to the following 15 questions. Reviewing these factors will help you attract desired investors and secure the required funding without breaking a sweat.

1.   What is the Composition of Your Team Management?

The team behind a new business is of much importance than the product because, without someone with the right set of skills, experience, drive, and temperament to grow your business, your great idea will not see the light of the day.

Your answers to the following questions will help the investor see whether it will be enjoyable to work with your team or not.

  • Who are the founders and the management team behind this startup?
  • Can you mention their relevant domain experience?
  • In the short term, what are the major additions to the team do you need?
  • Is the team uniquely positioned to execute your company’s business plan?
  • How big is the workforce?
  • What motivation do the founders have?
  • Is the team scalable in the next 12 months, and if so, what is your plan?

It’s recommended to hire experienced advisors during the early stages of your startup to help your team navigate certain challenges that new businesses experience when they venture into the industry and when seeking funding.

2.   How Big is Your Market Opportunity?

You need to convince the VC of the potential of your company growing really big because their primary focus is businesses that have the possibility of being scaled and meaningful. That means presenting small ideas will reduce the likelihood of securing funding.

Instead, present the actual addressable market, the size you plan to capture, and after what duration. Therefore, companies with small products or services can position themselves as a platform and then allow the addition of several apps and products. This is because the majority of the investors classify big market opportunities as those that can generate sales worth $1 billion and above. Therefore a founder has to package their business well to attract investors.

3.   What is Your Company’s Early Traction?

When asking this question, VC wants to know about your customers. Demonstrating your startup’s early traction can help you obtain venture financing and with favorable terms. So prepare your answers to the following topics carefully for this will determine the amount the VC will invest in your company.

  • Pilot customers, preferably brand name customers
  • Your customers’ testimonials
  • Strategic partnerships
  • Admission to competitive programs such as technology incubators, accelerators, or Y Combinator

So having information about your early traction, how you plan to accelerate it, the primary reason for the traction, and how your firm can scale it, such as getting press coverage by prominent websites or publications, can help you edge closer to funding.

Actually, dedicate a slide on your investor pitch deck for such headlines and mentions by renowned companies to boost the likelihood of getting a positive answer from the investors.

4.   How Passionate and Determined are the Founders?

Passionate and determined founders are dedicated to the startup. These are CEOs who clearly understand the business, how to grow it, and ready to face highs and lows along the way. A founder should appear professional, show passion and enthusiasm to grow a startup that might take a long time to develop.

For that reason, entrepreneurs should be able to give a story of why they started this startup instead of doing something else, as well as research on VC’s background and investment portfolio to ensure that they have common interests before pitching to them.

5.   How Well Does the Founder(S) Understand their Company’s Financial and Key Metrics?

Investors are looking for founders that can articulate their business’ financial and key metrics coherently. Using figures, founders should demonstrate how they will spend the money but not how long it will last. The conversation of a metric-driven founder focuses on the sales funnel, revenue, and customer growth.

Understanding Key Performance Indicators helps founders to set their priorities right and focus their teams around the critical metrics that reflect those priorities.

6.   Did a Trusted Colleague Refer You?

Venture capitalists ignore unsolicited pitch decks. However, you can capture their attention when introduced by a trusted colleague such as a lawyer, investment banker, another VC, or another investor.

7.   How Interesting is Your Pitch Deck?

After the introduction by their trusted colleague, you should send a VC a 15-20 page investor pitch. The investor will be looking for an interesting business model with a killer opportunity and committed entrepreneurs from this presentation.

The internet has many examples of great pitch decks of giant tech companies such as Facebook, Sequoia Capital, Twitter, Uber, and more. Carefully research well what these companies focused on so that you can align your pitch deck and executives summaries to the investors’ interests.

8.   Every Business has Potential Risks What are Yours and Mitigation Precautions?

Aside from business growth and revenues, investors want to know about potential risks and mitigating precautions. Therefore a VC will want to know whether the founders understand their business and industry very well.

They will need further explanation about the principal risks, legal risks, and whether the business model complies with laws such as expanding privacy protections, product liability risks, regulatory risks, and technology risks. Also, you will need to tell them about the steps you plan to take to mitigate these risks.

An entrepreneur that shows how they can eliminate or reduce different types of risks that a startup is exposed to can easily attract funding from VCs.

9.   What Makes Your Company’s Product Unique?

Investors want to know why you think your product or service is great or unique over what is available in the market.

So, they will want to know what users say about them, major product milestones, key differentiated features, lessons from their early versions, any key additional features that you plan to add in the future, as well as how often you will be updating your products or services.

10.   How You Planning to Use the Investment Capital and What is the Expected Progress?

Basically, investors are keen on how you will use their money as well as how soon you will seek the next round of funding. The manner in which a founder tackles this question helps them compare your fund-raising plans against your capital requirements. With their experience in other companies, they are able to tell whether your cost estimates are reasonable and whether the capital you have requested will be sufficient until the next financing.

11.   Is the Expected Company Valuation Realistic?

Entrepreneurs and investors are extremely concerned with the valuation put on a business. VCs are looking for attractive and reasonable expected company valuation. Valuation is the pre-money valuation or the company value that you agree with an investor before investing new money.

For instance, in a company whose pre-money valuation is $15 million, a VC can invest $5 million, pushing the post-money valuation to $20 million. Thus, their stake will be 5/20 or 25% at the end of the financing.

Since there is no fixed formula for calculating valuation, an entrepreneur can negotiate with an investor, but the higher the valuation, the better the deal and the lower the dilution for the founders.

On the other hand, VCs are motivated by a lower valuation in a promising startup because higher financing results in a larger stake in that company, thus higher returns when exiting as well as lower risks.

Key factors that are considered when determining the expected company valuation are:

  • Founders’ experience and past successes. A startup of a serial entrepreneur may command a higher valuation because it presents fewer risks.
  • The market opportunity size.
  • The company’s proprietary technology that it has already developed.
  • Its initial traction which is determined by favorable publicity, revenue, satisfied customers, or partnerships.
  • The valuation of similar companies.
  • Whether other investors are pursuing it.
  • The present economic climate. The valuation rises in a strong economy and drops during economic slumps.
  • Your business model’s capital efficiency. That is the amount of capital the business will burn before reaching profitability.
  • The progress it has made towards a minimally viable product.

Usually, the seed financing or the very early stage rounds ranges between $1 million and $5 million, while the valuation range for businesses with some early traction and are on Series A round is $5 million to 15 million.

The following are different ways that angel investors and VCs invest in a company:

  • Convertible promissory note
  • Simple Agreement for Future Equity (SAFE)
  • Convertible preferred stock investment

12.   What is Your Company’s Differentiated Technology?

Since the majority of venture capitalists focus on mobile, internet, software, and other technologies, the proposed technology of your startup is important.

Therefore the investors will ask you the following questions to determine whether they will invest in your company or not.

  • Does your startup have a differentiated technology, and if yes, how differentiated is it?
  • What is its competitive advantage over the existing technology?
  • Can the technology be replicated easily?
  • Will it be expensive to build the technology into each product?

13.   Does Your Company have any Key Intellectual Property?

Investors are keen to invest in companies with intellectual property such as patents, copyrights, trademarks, trade secrets, domain names, or patents pending.

They also want to know how your company developed its intellectual property, whether through government grants, done at the university, or with open source technology, in order to determine the extent your company can use it.

Still, they want the assurance that it doesn’t violate any third party’s rights or a former employee doesn’t have a potential claim to it. So you have to disclose whether the company owns the intellectual property or whether all employees and consultants have assigned it to the company.

14.   How Interesting and Realistic are Your Company’s Financial Projections?

It’s important to understand that investors want to put their money in businesses with significant growth potential. However, you should be realistic when preparing this slide because extreme cases will work against you.

For instance, a financial projection of $5 million in five years is low, while $500 million in 3 years is unrealistically high. Such predictions are considered extreme, especially when you have zero in revenues.

Therefore, develop realistic assumptions because they are easy to justify; otherwise, your potential investors will conclude that you don’t have a real handle on your business if your responses to your financial projections are not cogent and thoughtful.

15.   Can Your Legal Formation be said to be Clean and Compliant with Applicable Laws?

Companies that don’t comply with certain regulations such as employment laws, securities law, or have legal issues with third parties or among founders are red flags.

Actually, investors will not give attention to such companies, and therefore you have to ensure that your company is clean and compliant from a legal perspective before pitching to any investors.

The following are some of the legal mistakes that entrepreneurs and startups companies make:

  • Not making the deal with their co-founders clear.
  • Not starting the business in a proper legal form, thus incurring higher taxes.
  • Not researching the company name properly, thus ending up with one with a domain issue or trademark infringement.
  • Not complying with securities laws.
  • Ignoring important tax considerations.
  • Hiring inexperienced legal counsel hence getting into a lot of legal problems.
  • Not protecting your intellectual property and more.

I'm a passionate and full-time blogger. I love writing about startups, how they can access key resources, avoid legal mistakes, respond to questions from angel investors as well as the reality check for startups. Continue reading my articles for more insight.

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