10 Questions Venture Capitalists and Angel Investors Are Going To Ask
When raising money from venture capitalists or angels, you’ll want to meet as many as possible. They won’t all invest, but each time you pitch, you get better. Each time you pitch, you get asked different questions, get different opinions and ideas. It’s worth it to pitch as many people as you can, as often as you can. Wil Schroter says it perfectly, pitch everyone, all the time.
Some questions will get asked over and over. And you’ll discover those patterns quickly enough and adjust your pitch accordingly. If you have a less-than-stellar answer to a question that gets asked once or twice, it’s not a big deal. But if your weaker answers are to the most common investor questions, you’ve got a problem.
With that in mind, here are some of the more common questions investors will ask:
- So what’s your business all about? The wording of this question will change, but this is the classic “elevator pitch” question. Translation: “In the shortest amount of time possible, grab my interest by the proverbial you-know-whats.” Sell them quick, with something simple and powerful they can remember; and keep reiterating that message throughout your presentation.
- What’s the barrier to entry for competition? For Web 2.0 startups this can be tough. The question comes from VCs and angels that might not be as familiar with the overall industry and the ease with which many web applications can be built. They’re looking for a real technological barrier that might not exist. Some answers that might help you skirt this topic: launching big, building a devoted community, key partnerships and/or customers (before launch), we’re cooler than everyone else (this won’t work.) None of these answers are great (for a host of reasons.)
- What’s going to stop big monster company in your space from copying you? This is almost identical to Question #2 but it’s more commonly asked because there’s always competition. And, it’s usually from the “big bad wolf” company that’s got tons of money, lots of market share, a huge staff and years of experience.
For starters, don’t say, “What competition? We don’t have any“. There’s always competition.
Secondly, this is a tough question to answer. What is stopping “big bad wolf” company from copying you instantly and smashing you like a bug? Generally, you can argue:
- We can move more quickly.
- Big bad wolf is too busy managing what it’s doing to innovate.
- They’ll acquire us rather than copy us (if you have examples, use them.)
- Why are you raising the money you want to raise? The amount you’re asking for is critical. Make sure you’ve done your financial homework. Don’t tell them your numbers are conservative, just explain to them how you arrived at them.
- How far does that money get you? Have a good answer to this question. Couch this in product and financial terms, i.e. “It gets us 6 months past launch, when we expect to be cash flow positive.” The best way to think about this is to calculate how long the money will last if you earn zero revenue. Count backwards by 4-6 months and that will tell you when you need to start the process of raising more money. If the money is only going to last you 4-6 months, you need to start looking for more money almost immediately (which isn’t a pleasant thought.)
- Do you have any customers? Have you spoken to potential customers? Investors are looking for traction, or at least the inkling of traction. As soon as possible, try and get a few potential customers to say, “Sounds interesting.” You might even use them as references. This raises the comfort level for investors and helps answer the question, “What’s the market?”
- What’s your marketing strategy? For early stage companies this is a very tough question. Chances are “just getting to freaking launch” is what you’re thinking, but that’s not good enough. And “launch big” is equally uninspiring. Think about presenting a timeline of events and customer acquisition numbers that you’re anticipating, tied to marketing. Throw in a variety of strategies that you’re going to do or researching. Marketing will be critical to your success, so you better plan for it sooner rather than later.
- What are you coding in? Investors do want technical details. This is an easy question to answer at least (assuming you know!)
- How are you handling the technological infrastructure for scaling? Like I said, investors want technical details. They want to know that you’ve thought about the behind-the-scenes technology to support your system. When you get on the front page of TechCrunch, will the server hold up? When customers are signing up faster than you can process their credit cards (don’t let that happen!), will the system stay running at a reasonable speed? The further you get along in the process with investors, the more technical details they’ll want.
- What’s the team look like? What are your backgrounds? Investors want to know the backgrounds of the founders. If you’ve got people on staff, they’ll want to know who, why you hired those people, and who else (and how many) you need to bring on board. They’ll want to know how quickly you expect to grow the team over time as well.
Although there are common questions you’ll get from venture capitalists and angel investors, what’s more fascinating is that each investor will ask different questions. You can’t be prepared for every question, but even if you get new ones, the more comfortable you are pitching (because you’ve done it so many times), the better.
Ben,
Great post. I have been to a few business plan competitions and it is surprising to me how many competitors can’t answer these questions. They haven’t done their homework. Angels and VC guys have made a living at guaging an idea or start-up companies potential by responses to these and similar other questions. If you can answer all of the above questions, you may have just earned a call back meeting to do some more talking. If you can’t answer these questions, good luck!
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Hey Ben,
Coming over from your reply to my Facebook thread. Some really high level thoughts in your blog. My answer to #3 is usually about the relationship I already have to my user base. You can’t fake a relationship no matter how much money you have. I wonder sometimes if this is an adequate answer, because sometimes you can fairly simulate a relationship with branding, i.e., I think of Yahoo as a (great!) company and Google as a wonderful group of people who are geekily techy but kinda cute, like me. Weird.
Ben, I know the audience for the article are those people that might be in a position where they’ll soon be talking to venture capitalists; however, I think you can take these questions and apply them to even small side businesses. I actually plan to use them to help me get focused on some of the side stuff I do. Thanks
@Garrett: Being prepared is important, agreed. Equally important - knowing when you don’t know the answer, and being able to admit it. I think it’s OK, especially for early stage startups to say, “We’re not sure, but we’re looking into it.” Recognize the weaknesses and address them.
@Tinu: Hi! Welcome from Facebook. That’s a “nice” answer; whether it’s effective enough, I’m not sure. I’d lean towards “no” but it’s as good as any I’ve provided. Audiences are fickle, they move from one thing to another. Certain things will keep them - great customer support, constant value add - but it’s definitely tough to have a perfect answer to Question #3.
@Bret: Happy to help in any way I can!
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I read each of your posts about VCs with interest Ben — this will greatly help all those who come after you, myself included.
I expect this list of questions to be particularly useful, so thanks.
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I find these types of posts to be really useful as thought-bait. It’s not likely I’ll be going for venture capital in the near future, but a lot of these questions are really applicable to business one way or another.
If I could satisfy VCs then I know my plan is a lot stronger than if I couldn’t satisfy them. Gets me thinking…
@Mason: I love the term “thought-bait.” Very cool.
Thanks for stopping by and commenting.
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What about: What’s your revenue model? Answering this question in a succinct manner that makes sense to those inquiring is quite crucial. Could be the trampoline, or could be the pitfall to the meeting.
@Jeffrey: Yup. Although some VCs openly say that the business model isn’t a priority - especially for consumer-centric apps - where they’re more interested in how you’ll generate traction. At minimum you need ideas for business models you plan to pursue, even if they’re down the road.
Thanks for stopping by and commenting!
In my recent meanderings around the flagpole with investors, i have found that my strategy of having multiple marketing scenarios available, or ‘giving them choices’ to envision hold alot of weight. At that point, they will know that you are a strategist with a good solid business mind that knows, “Nothing ever works out as planned”. Either the launch is ‘too’ successful or too slow in the beginning with a gradual upbeat in pace. Ask questions and get them ‘touchy feely’ with your project in the beginning….For example, my when pitching my CabDaddy program (patent pending) I simply looked over at one investor and said, “Joe…You’ve caught a cab before, right?” He said, “Well yes I have?” I asked him, “What happened?” And he proceeded to tell a scenario of events that told about how the weather was bad outside and he was trying to hail a cab and he was getting passed by occupied taxis…So I said, “Joe, if I could tell you that if you had CabDaddy on your phone that day and couldve established your location, found the nearest available taxi to you, and called him directly without leaving the building, you would’ve bought it for $100 right there wouldn’t you?” And he said, “I don’t know about $100 (laughter), but Yeah! I would have. I enlisted one investor to basically sell it to the others and with great results, although I do have to say the equity offers were outrageous and I didn’t accept any of them and we’re still negotiating. So, basically you must understand that you are the one with the power. If you have a product that IS going to be successful, lay it all out there, be animated, have a good time, and get people to put their hands on it, even if they can’t see it. Have a great day…Great post, btw.
@Sam: Thanks for the story, it’s a good one. And I appreciate the comment. Hope to see you around some more…
[…] mouths.) Although some of this is understandable (raising money is extremely hard and can be a frustrating process), I’ve often thought it’s in bad taste and just plain […]
Hey no problem. You will see this very soon. I’m headed to the “Next Big Idea In Wireless” conference as a presenter in Hoboken, NJ next month. There will be 200 investors and C-Levels from all wireless carriers. Keep your fingers crossed for me. I want to make money, but I am most concerned with what my projects mean socially and economically for our country. I want to make money to use it for good. I am so excited. Thanks for your encouragement. Have a great day and feel free to contact me anytime. Especially if you have any programming, design, or start-up exec skills.
Sam