This post was originally published on Thoughts on Tech Startups and Venture Capital
We’ve written a lot here about fundraising and how it is a complicated, and at times, confusing process. To fundraise effectively you need to prepare and have a strategy, understand different types of investors, understand how much to raise and create an investor pipeline.
We also talked about a fundraising deck and how you put it together. In addition to the deck, it is helpful to prepare answers to typical questions that investors tend to ask.
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 also are 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 are looking 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 as a founder aren’t clear about your metrics or not measuring the right things, 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. Investors want to know how you think about KPIs, look at your dashboard and understand how you think about growth.
They will likely dig in on how you think about attaining product market fit as well.
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 – 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.
In addition, investors expect you to size accessible markets and do the calculation bottom up. Too many founders say they are in $1BN+ markets without realizing that, because of their business model, they can’t be addressed.
Spend time sizing up your actual addressable market using your pricing and growth projections.
7. What are your CAC and LTV?
This is another typical question that investors ask founders during each round of financing to establish how fluent they are in the business.
In the early days, founders are expected to know the terms and have an idea of what the numbers are, but it’s fine to say that you are early, and the numbers are likely to change in the future (typically CAC goes up and LTV goes down).
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?
The LTV conversation touches on churn, revenue per customer and enables investors to understand how you think about your whole customer lifecycle.
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. If you make money indirectly, via advertising, they would then focus on how your acquire customers.
If you are a marketplace, the conversation turns to whether you are going after supply or demand and the incentives to be on the platform. What will be the expected average revenue per user? Will you have recurring revenue? All these questions get explored when investors ask about your business model.
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.
In addition, if you are currently free or have a free tier, investors will look to understand when are you planning to get rid of it and what the implications will be.
10. What are your unit economics?
Unit economics give essentially 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.
Many investors, however, are now weary of this approach because as you scale, new challenges and new unforeseen costs may arise.
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.
You can also focus on a specific vertical. For example, if you are a security software provider, you can first focus on insurance companies or law enforcement agencies. Having a focus narrows down the opportunity but allows you to really perfect the product and sales.
When talking about your go to market, investors are really looking to understand your strategy and why you think it will work.
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.
The challenge is that most obvious channels often do not really work or aren’t cost effective. That is when you start your CAC via Google or Facebook ads is just too high. Investors are looking to understand if you figured out a growth hack / have an insight on how to acquire customers quickly and efficiently.
In the B2B world, investors want to know if you have an unfair advantage, like you’ve worked in the space before and have a rich rolodex. They are looking to understand if you are able to secure key partnerships that can help you distribute the product faster and win the market faster.
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.
Before Facebook, there was Friendster, before Google there was Alta Vista. Even Uber wasn’t the first company to think of on demand rides, and AirBnB wasn’t the first company to let people host people in their apartments.
Before the current wave of VR and AI, there were at least 3 other waves. Why do we believe now is different? Why do we believe now it will actually happen? Some argue that we finally have enough cheap computing power and have evolved other key technologies necessary for VR and AI to go mainstream.
When investors are asking “Why Now?”, they are really asking about conditions of the market, context and state of society – dozens of factors that will make a difference between success or failure this time around.
14. Why you? What is YOUR Founder-Market-Fit?
We’ve written here before about the importance of Founder-Market-Fit and how most investors pay close attention to it. 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. If you grew up in a well to do family where you didn’t have to struggle, investors may not be as excited about funding you compared to, let’s say, an immigrant.
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?
When asked where you went to school, people look to see if you went to a top school, what you studied and what you learned. Sometimes this conversation leads to a common connection. Sometimes it is just a starting point for learning more about you. Investors are looking to assess your level of intellectual curiosity and honesty.
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 are 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.
However, they also know that you haven’t worked together. Friends don’t always make the best business partners, and startups have ruined thousands of friendships.
Most likely, investors are looking to hear that you worked together before, ideally in another startup and ideally for a while. This would imply that you get along socially, but more importantly, you can make things together under a stressful environment.
17. Who are your competitors and how are you different?
We’ve written here before how 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 is 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, your true north?
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 tem vision.
Similarly, a question about your true north is an important one. It reveals what you aren’t willing to compromise on. Great companies are always flexible on their path, but not flexible on the destination.
19. What milestones will you achieve with this financing?
We touched on this topic in our How Much Capital Should You Raise post. 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.
There are really two outcomes investors are looking for – either profitability, which is very rare in early stage startups, or the follow on financing. That is, investors are asking if you get funding and then execute and hit specific milestones, will you be fundable again? For example, if your plan says you raise $1MM, and then grow 20 percent MoM to achieve $40MRR in 12 months, to you this may sound great, but to investors it is clear that it will not be enough to raise a series A.
It makes sense to really think through your milestones and where you want to land and why.
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: a) Your HR costs should roughly be 70K-100K per head. b) 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 c) 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?
Another straightforward question based on your financial model. 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.
Also, avoid cookie-cutter 20 percent MoM year round growth assumption, as it may come across as sloppy. Really think through seasonality and other factors that may influence your growth. Do your customers pay you right away or not? Does your cash in the door trail booked revenue? Reflect all the nuances in the model and your revenue forecast.
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. Investors are looking to understand how you think about profitability, and tie this to the conversation about your burn and the need for follow on financing.
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.
This is a complex and important topic that is less likely to be top of mind for the founders, but is certainly something investors are paying a lot of attention to.
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 a) how do you think about risks in your business b) do you acknowledge risks and c) most importantly, are you 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.
Risks vastly range from building incorrect products, to the market not being there and to key distribution deals falling apart. Whatever it is, be prepared to talk about risks and show that you’ve been deeply thinking about 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 is 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.
30. How much capital are you raising and what are the terms?
You should have clarity 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.
And now please tell us what we missed. Share the questions that investors asked you during your fundraising conversations.
I only met Ron Conway once. He was an early investor in Datahug and when I met him it was at his home in San Francisco. This was not your normal investor meeting. It was all about introductions and understanding who I wanted to meet. It was sublimely simple yet hugely effective.
Just in case you haven’t heard of Ron Conway, he is probably the most famous and successful angel investor in Silicon Valley. He was an early investor in Google, Facebook, and Twitter and is an institution in Silicon Valley. Therefore, it was no surprise that we were A. delighted to have him as an investor and B. pretty nervous that we were about to meet this living legend.
We arrived at Ron’s apartment and were greeted by his associate. The meeting was probably about 45 minutes and I only really remember three things:
- Ron was very calm, laid back and friendly. He mentioned his Irish roots and that he had recently met the mayor of my hometown, Cork.
- I joked that since our vision involved unlocking relationships that someday “Datahug might build an automated version of Ron Conway.” I didn’t get the laugh I was expecting… Oops.
- Ron had several sheets of paper in front of him. Each of those sheets contained about 50 names. Every one of those names was a top tier VC, Angel or Corporate Dev Lead. This is when I discovered the power of having Ron Conway as your Angel investor.
Ron asked just one very powerful question, “Who do you want to meet?”
I rattled out four or five dream introductions without blinking. He asked his associate to go ahead and make those intros on his behalf. He said that he would make up to ten initial introductions and that if I needed more to get back to him for the next ten. He leafed through his printed Rolodex and suggested four or five more people he thought we should meet with. His final words were that if for any reason we didn’t see the introductions coming through we should just contact those people directly and “tell them Ronnie sent you.”
And that was it. 5 minutes later we were back outside his apartment armed with 10 hugely valuable introductions to key Silicon Valley insiders. We leveraged these introductions to build momentum, secure early customers and gain valuable insights into our markets. They made an impact on our business and I will be forever grateful and a fan of Ron Conway. I’ve not met with Ron since, but every now and then I’ll reach out to his team with an introduction or request for help. They are always responsive and great to engage with.
As an investor, and former founder, I want to add value like Ron Conway and his team did for us. I want to #GiveFirst and help other founders succeed where I can. I’ve been lucky enough to witness how one or two well-placed introductions have helped founders raise capital, win customers, and build their teams.
When mentoring teams here is why I always try to ask “Who do you want to meet?”
You discover how you can add value.
The answer to this question often triggers connections in my head that I would never have considered. You often don’t really know how you can help until somebody asks. The answer gives me a better sense of ‘directionality’ for how I might help.
For example, I recently spent time with a great founder in Bulgaria. We had a great chat and at the end, I asked my usual question. He immediately replied that his dream introduction was to the founders of Hired. I had randomly bumped into that founder twelve hours earlier and was able to take out my phone and connect them straight away. I would never have thought about connecting them until he implicitly asked for it as I had failed to see the connection (which became blindingly obvious when he explained why). They ended up hitting it off and spent several hours together which has led to more follow on introductions and meetings for that founder.
You learn more about the founders.
I have learned so much about founders by how they answer this question. It’s fascinating to hear about the types of people they want to meet. It’s also a really great way to gauge how focused and up to speed a founder is on their sector. Founders who can’t immediately answer this question with conviction immediately raise a red flag for me. You also learn a lot about the founder when they explain why they want to meet X or Y.
You remember the founder and their company.
You will remember really specific asks like ‘I want to meet owners of NFL or NBA Teams.’ It could be four months after you’ve met the founder when you might randomly bump into the person (or type of person) that the founder wanted an introduction to. These specific introduction requests always stand out in my mind and it’s a great way to reconnect with a founder by helping them with an introduction several months later. This proves to founders that you listen to them and genuinely want to help and support them.
You add more value to your network.
The best introductions are where both sides of the introduction benefit. By making highly targeted introductions you help create genuine win-wins. For example, other investors are often very grateful for targeted introductions to Founders who you are working with. The same is true for potential recruits, customers, and partners.
You get to #GiveFirst.
I’ve always been impressed by how Techstars has built their whole culture and reputation around this #GiveFirst mentality. Call it karma but being helpful today is probably the best long-term strategy to being successful as an investor in the future. Helping founders with introductions is not just good business but equally rewarding on a personal level when you can help entrepreneurs succeed.
Ron Conway and networks like Techstars are testaments to this simple, but often neglected, way of giving. It’s so simple to ask, can be hugely impactful, and costs very little in terms of time to execute. I’d encourage you to include it in your next mentoring conversation. 🙂
P.S. If you want to learn more about the #GiveFirst philosophy and it’s proven impact in business then read ‘Give and Take’ by Brian Lewis. I first heard about this from David Cohen and it’s a good read with good examples of how givers outperform takers.
“I love what you’re building and I want to invest, BUT I just need to see some more meaningful traction.” -Every VC Ever
Every entrepreneur has heard this at one point or another. I heard it all the time as a former founder myself, and I’m embarrassed to admit that I’ve used it a few times as an investor…but no more, and I’m writing this post in part to hold myself to it.
Traction has become this ubiquitous term that too many VCs use to meekly pass on companies, especially early-stage or pre-seed startups. I recently read a post about “The Current State of ‘Seed’ Investing” by Nick Chirls of Notation Capital, in which he argues that modern day “seed” funds invest more like Series A/B investors of previous generations. I agree wholeheartedly with this and like Notation, Wonder Ventures likes to be the first institutional capital in, which often means we invest in startups before there’s any meaningful traction. We do this because we think it will provide outsized risk-adjusted returns when compared to many other stages in the market.
So then what exactly do we look for when we meet true early-stage founders before they’ve achieved meaningful traction? I look for things that I’ve started categorizing as “Micro-Traction.” There are a ton of resources available for founders looking to raise capital from the traditional seed firms once they have this so-called traction, so this is a post about three key elements of micro-traction that founders can demonstrate to create funding momentum before meaningful revenue or customer growth.
(Note: This is for companies with products already in market … a future post will talk about investing in pre-product companies.)
- Show Small, but Measurable Trajectory of Growth
- Identify Customers/User Groups
- Prove Micro-Customer Acquisition
Show Small, but Measurable Trajectory of Growth
“Let’s stay in touch. I’d love to invest when you grow to $100K MRR.”
I’m guessing you’ve heard this one before. And when you did, you probably thought, “No duh! When I hit $100K MRR lots of people will want to invest.”
So how do you show traction to early-stage investors before you hit $100K MRR? Show measurable growth and a positive trajectory in an important business area (most likely revenue)….it’s OK if it’s on a small base.
For example, as explained in Mark Suster’s seminal post about investors looking to “Invest in Lines, Not Dots”, you could show an early stage investor the following trajectory:
- Meeting 1 (Jan 1): Pitch the Idea & Vision for the company
- Meeting 2 (Feb 15): Have your first 20 customers paying $50/month
- Meeting 3 (March 30): Have 100 customers paying $50/month and show a marketing channel that has led to acquiring half of those customers in the last 2 weeks.
At this point we’re talking about only $5K MRR (a lot less than $100K), but the trajectory of the three months of accelerating growth and execution shows me where your business is going and gets me excited about it. This may not be a big number by traditional “seed” investor-traction standards, but investors love to extrapolate from results. Plus, you’ve just demonstrated your ability to execute across three months of interactions with the investor.
Identify Your First Users/Customer Groups
“Your product looks great! Let’s talk again when I can see 12 months of customer data and a cohort analysis of churn”
Thing is, you haven’t even been in business for 12 months! You only launched a beta of your product three months ago, so “seed” investors are basically saying they won’t even consider your business for investment for another nine months. How do you show where your revenue is coming from and who your customers are without large numbers and months of data?
As an early-stage investor, I am less concerned with the scale of these numbers, but rather that you can prove that you’ve identified a prototypical customer and you know where to find more of them. One way for me to understand the organic fit of these customers is to become one myself. In an ideal early-stage scenario, an investor can use your product while getting to know you.
If your product is for a specific customer who is not the investor, then push the investor to think of a friend, contact or, even better, a portfolio company that can use the product instead. Either way, be generous in giving free and easy access to your service and showing how valuable it is. And if they’re sharing it with others, this doubles as great business development for your company by getting intros to the investor’s contacts. There’s really no reason to be stingy.
Prove Micro-Customer Acquisition
“It seems like your customers really love your product. Can I see the last $100k of marketing spend broken down by channel?”
$100K? You haven’t even raised $100K of funding yet, much less spent $100K in marketing. Many “seed” or Series A investors will ask to review your marketing spend over a couple of months, looking for statistically significant proof that you have already begun spending the $$ to acquire customers at scale.
So, how do you prove your command of customer acquisition to early-stage investors? The key is to prove at least one (ideally two) channels at a small scale. Find ones you can test for a modest amount of money (say $500) to obtain specific metrics on acquisitions costs, conversions, and most importantly, the scalability of the channel.
For example, Google Search Ads are often one of the best ways to show micro-customer acquisition, as Google provides you with the tools to spend small dollars, clearly track performance and get a decent feel for the scale of potential leads they can provide.
One note, I often hear founders tell me their acquisition strategy will be driven by free channels, such as, BizDev, Partnerships, Advisors, SEO, Content Marketing or PR. Heads up, these are examples of the types of answers that usually don’t stand up to the test. Because they are free, every startup is going after them and you can’t buy scale.
If you’re going to mention the above strategies, you would not only have to show me a detailed plan for execution, but also make me believe you have a unique competitive advantage to be able acquire customers via these very unpredictable means.
If your company can clearly enumerate the 3 key elements of micro-traction, but lack, say $100k in MRR or 12 months of customer data, then traditional Series A and modern “seed” funds may continue to pass on your company. Because let’s face it, they are risk-adverse and not truly early-stage investors.
But showing micro-traction will definitely be useful in pitching your business to Wonder Ventures and other similar early-stage firms. You can hold me to that.
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This was originally published on Medium.
Many entrepreneurs will recognize this scenario: You finally get a meeting with a big-name VC partner. In preparation, you spend a week polishing your deck, financial model and pitch. Then, you get to your meeting and the partner is 20 minutes late. Plus, he or she has to run on the hour, so you have 40 minutes to squeeze everything in.
So, you start running through your pitch while the VC looks on, at best, half interested. Then as you wrap up, the VC says something like, “your business is not a current fit for their fund” or “it’s too early and you should come back with some traction” (see my previous post on Micro-Traction).
But, then something that may seem weird to a first-time founder happens.
Just as the VC is passing on your deal, they start dropping names.Though they aren’t going to invest, they know the VP of Cloud Services at Google, an editor at Vogue, or some other relevant contacts that could be partners or clients to your business.
I’ll admit, I often partake in this very behavior at Wonder Ventures. It comes from the genuine desire to help founders, whether I will invest or not. I can see they’re putting everything into their company and I want to use my network to help (and I assume most VCs that name-drop are doing the same thing).
But trust me. For all the times that I offer relevant introductions to entrepreneurs, the percentage of them who take me up on this is way too small. So, I put it to all entrepreneurs to not overlook this opportunity. Here’s why:
Even if they “passed,” it shows your follow-through
Hustle is one of the most crucial qualities of an entrepreneur and something I always look for before investing. Even if I say I am not going to invest right now, if I offer to make an intro for you and you don’t follow up (much less write it down), then what kind of hustle do you have? How are you going to overcome the many hurdles that stand in the way of a startup, when you can’t even capitalize on an intro handed to you on a silver platter? Some investors use this as an implicit test. So follow through, and you’ll pass.
It’s the best way to build your relationship with the investor
If you take the time and effort to follow through on the investor’s connections, you could turn these introductions into relationships, or even pilot customers and business partners. As a result, the next time that investor catches up with the friend they connected you with, that friend just might mention how excited they are by you and your company.
This, in turn, could bring a great investor back to the table and possibly push them over the edge to invest in your business.
It might show that you don’t want them to invest
The relationship with your investors is key. So, any investor who offers introductions offhand and then can’t follow through is probably an investor you want to avoid. Either they’re overstating their connections, or they just aren’t very helpful. Either way, it’s a sign that they won’t be a very supportive (or trustworthy) investor.
#StartUpHack: Use VCs for Business Development
This is also a hack that I give to many founders. It’s hard to get introductions to potential partners and customers. After all, you’re running a startup and can’t afford a sales team. But, VC introductions and due diligence can lead to tons of great connections, usually directly to company founders.
For example: If your company sells dev-ops tools to SaaS companies, what better way to get in front of them than as part of due diligence from a VC with a deep SaaS portfolio? Work to get these introductions and you’ll significantly accelerate your business development pipeline.
In sum, these introductions from investors serve as one of the best ways to build relationships with them, as well as a subtle form of due diligence of you and your company. Don’t overlook them and don’t forget to follow up. Because if you over-deliver on these intros, you’ll see that many investors will get excited to be a part of your startup.
This was originally published on Medium.
This post was originally published on Thoughts on Tech Startups and Venture Capital
Last week we wrote about questions that investors ask founders during investor meetings. This week we are reversing the table and talking about questions that founders need to ask investors.
Most founders spend little time asking investors questions, and that’s too bad. Good investors love it when you ask them questions, because it shows that you are thoughtful and don’t think of them as just a walking wallet.
By asking the right questions, you can avoid happy ears, avoid a MAYBE, and really qualify investors in your funnel. By asking questions and getting clear answers, you minimize the chance of wasting your time with investors who will not invest.
1. Are you interested in potentially investing in my company, and if so, what are the next steps?
No first meeting should end without you asking this question. Be direct. Do not be shy. Whether you are meeting an Angel investor or a VC, ask this question before you end the meeting. Every investor by the end of the meeting will make up his/her mind.
They will not decide to invest, that basically never happens or happens very rarely. Most likely though, the investor will decide to pass, because most investors pass on most companies. And some investors will want to continue the conversation.
By asking this simple and direct question, you will know exactly where you stand. If the investor indicates interest in continuing the conversation, then ask about the next steps. Listen carefully to what the investor is saying.
For example, if the investor says keep me posted, or I am traveling the next few weeks or I have a lot of things I am working on – this is known as a soft NO or definitely not now. When an investor is vague, assume he / she is not interested.
On the other hand, if the investor proposes to set up a follow up meeting or a call in the next week or so, this means there is interest. Listen carefully to what the next steps are and decide if the interest is real.
2. What is your investment process, and how long does it take?
If the investor is interested in taking the next steps, you need to ask about the whole investment process. The process will vary widely depending on the type of investor.
Let’s start with an individual angel investor. Most likely, the process will be 2-3 meetings and some diligence and reference calls. It is pretty light, and depending on the check size and where you are in your round, it is totally fine to ask to commit in the end of the second meeting.
Some angels like to co-invest with others, and that often prolongs the process. If others are involved, this means more pitching and more coordination between the group or a syndicate. Ask how long will this take, what will be total check size and actively manage this process. Often times, co-investors will drag the process and the initial angel may change her mind about investing.
Similarly, angel groups have a clear process that is typically not fast and involves multiple meetings and diligence calls.
Typically, a formal angel group will assign a team of angels to an investment committee for each deal. You will need to meet with them at least a few times and then, if things go well, present to the entire angel group. After that, there maybe more diligence.
The process for Micro VC and VC firms varies, but in general takes 3-4 meetings to get a positive decision. Every firm meets regularly to evaluate the deal flow. When you hear that you will be talked about during the partner meeting this week, in general, this a positive thing, but be ready for a quick NO coming out of that meeting.
If the VC is engaged, you should be meeting with more and more partners in the firm as the process unfolds. For larger checks, you will be invited to present at a partner meeting. That would be a critical meeting for a YES decision. If a firm has a seed program and writes smaller checks, then you might be able to get a positive answer without presenting to the entire partnership. Read 8 Things You Need to Know about Raising Venture Capital for more details about raising from VC.
3. What is your check size?
Another important question to ask is the check size, because you want to know your result in case you are successful. Knowing the check size helps influence the timeline and, frankly, the effort you put into this particular pitch. For example, if you are raising a $1MM round you can’t spend a ton of time with people who write $25K checks. You simply won’t be able to get to the finish line if you focus on those.
What you are looking for is to start your round with smaller checks, but quickly move to bigger ones as you have more and more committed. For $1MM round for example, you want to spend most of your time on $50K, $100K and hopefully get one check of $250K or more.
Oftentimes you will hear a range. An angel can say I invest $25K-$200K, or a VC invests anywhere from $300K to $5MM.
Ranges, in general, aren’t great because they lack clarity. There may be complexity or another message behind them. For example, an angel who says $25K-$200K may only invest $25K personally and then syndicate out the rest. The syndicate may or may not come through, so you can’t count on that money.
Similarly, when a VC names a range, it might actually mean that they do seed exceptionally rarely. If you dig in, you will find out that the only $500K check the VC wrote was for a serial founder they knew from before and that their minimum is $2MM for other investments. This is important to understand, because if you are raising $1MM they aren’t the right investor for you for now.
4. How many more investments are you planning to make this year?
Surprisingly for founders, not all investors may be actively investing. Even more surprisingly, they would still take meetings to learn about the company. Angel Investors may be out of cash and tell you they aren’t liquid. Or they could plan for, say 6 investments per year and already did 5. In that case they would be much harder to get the check from.
Number of investments per year is called pacing, and the disciplined investors pay a lot of attention to it because they want to be investing continuously through the year. For example, if a VC has a seed program, and you are talking to them in October, and they decided to fund 10 deals a year and they already funded all 10, there are no more checks left. With this information, the founder should reduce the chance of being funded by this firm to basically 0.
Another, much more subtle issue with VC would be capacity. Some partners just don’t have the bandwidth to take on any more investments. In that case, they would still meet with the founders, but they just can’t invest. Asking about ability to invest upfront saves a lot of time.
5. Who else needs to be involved to make the decision to invest?
ABC in sales is to find a champion and to find who can cut the check. Similarly with fundraising, when you are dealing with angel groups and venture firms, it is important to understand who will be involved in making the decision.
Some angels tell you that they co-invest with friends. This can be both a good thing or a bad thing. The good is that there may be more capital available if you succeed, the bad is that the decision is distributed. Be sure to meet everyone who is involved in making a decision, don’t let other people present the business on your behalf.
Similar with VC firms, understanding the process of decision making is important. In most VC firms, associates will not be able to make a decision without involving a partner. Which partner is making a decision? Can you meet them? Again, making sure that you meet with the decision maker is critical on the path to getting a YES. Another way to think about this is that if you don’t meet the partner, it is basically a NO.
6. What is the last company backed, and why?
This is a simple but relevant question. You are testing for how quickly the answer comes, how enthusiastic the investor is and when was the investment made.
It can be quite telling one way or another. Has it been a really long time since last investment? If so, what does it mean? Is it that the investor has a high bar or is it that they don’t have capital left to invest this year? Ask about the number of planned investments question and you will have the answer.
You also want to hear the WHY. What made the investor write the check? Was it an amazing founder, vision, market, etc? Listen carefully to the answer, as it should be helpful to figure out what the investor will look for in your startup.
7. Have you invested in a competitor, or evaluating investing in one?
You should ask this question 100 percent of the time, because unfortunately, some investors will not tell you this unless you ask.
If an investor invested in a competitor, even if it is not a super close competitor, the chance of you getting a check from them is close to 0. It really is 0. VCs don’t invest in competitors, and angels avoid doing it too. The reason is that it is hard to help both companies, since they are competing. It is essentially a conflict of interest.
Evaluating investing in a competitor is much more subtle. It is typical that when a venture firm is planning to make an investment in the space, they do a lot of digging and research. Part of the research is that they would reach out to all competitors and try to get more information. A VC is trying to do its best to pick the best company in the space.
You may get a call from an associate of a firm saying that the firm is interested in the space and wants to talk. You will be asked a lot of questions, and at times, even move through the process only to find out in the end that it was a so-called “brain suck”.
This may seem very unfair to the founders, but it is the reality of what’s happening in the market. To avoid wasting time and getting hurt, ask about competitive investments or research upfront.
8. What are your concerns about our business?
This is a great question that Steve Schlafman from RRE ventures suggested founders ask.
Why wouldn’t you invest in my company? How do you see the risk here? What do you think won’t work / I am doing wrong?
By asking this question directly, you are accomplishing several things. First, you are signaling that you are open to feedback and value it. Secondly, that you respect the opinion of this investor.
More importantly, you are likely getting valuable information, a perspective of an investor who sees dozens and hundreds of companies per month.
The concerns will range from market size, to acquisition channels, to competition and pricing. Having this information can help you work through the concerns and address them during the investment process.
9. What is your follow on strategy?
Some investors follow on. i.e. put more money into the companies, and some don’t. Both strategies are perfectly fine, but it pays off to know.
Specifically, if you are raising money from angels, say $1MM round, and most of your backers do not follow on, this means that you may have a hard time raising a second seed. Most companies need more capital before they get to series A, and most of this capital comes from insiders – investors who already invested. If most of your insiders don’t follow on, you will need to go outside to raise more capital. This can be tricky, especially when you are post seed and before series A.
With VC firms, the dynamic is different. Some VC firms deploy a smaller amount of capital at the seed stage with the idea of leading series A. The follow on strategy is to lead series A. However, there is a potential issue that founders need to be aware of – IF the firm decides to not lead series A, there may be a signaling issue to the rest of the market. It pays off to connect with other founders that the firm backed to get the color on this dynamic.
10. How do you help companies you back?
Many investors talk about being a value add in addition to $. Ask how exactly does this particular investor help and ask for specific examples involving companies the investor backed.
Some investors come with a massive network. Some larger VC firms will help you recruit and scale. Some smaller angels are great at pricing and financial modeling. Some investors really understand distribution.
Whatever it is, investors like being asked this question and it is helpful for the founders to know.
11. Who are some of the founders you backed that I can talk to?
Much like how investors reference check founders, the founders should reference check investors. Ask for 2-3 founders that this investor has worked with.
You don’t necessarily need to connect with them after your firm’s meeting with the investor, but it is a good question to ask and see what the answer is.
Great investors will have raving references from the founders they supported and less than great investors will be reluctant to name names.
And now we want to hear from you. Founders, please tell us what questions you asked investors during the first meeting that you found helpful.
Applications for the Q1 2017 accelerator programs close October 15. Apply today.
We recently held an AMA with Techstars’ Co-CEO, David Cohen, where he answered commonly asked questions from founders about topics such as forming a team, developing an MVP, and applying to an accelerator program.
Any advice to founders who need more resources to develop an MVP or a presentable prototype? What’s the best method of getting investors to hear out the idea/plan when you don’t know anyone in the community?
These are kind of different questions so I am going to go at them separately. I’ll tell you a quick story of a company called Everlater that sold to MapQuest, AOL and came through Techstars. When I first met Nate and Natty, they were Wall Street types and loved to travel. We funded them, but we only funded them after watching them try to learn how to program.
They were so passionate about this idea coming out of their minds into the world that they actually taught themselves how to code – they were terrible at it, not very good at all. But later on, they got better, but it was still a crappy prototype and a crappy MVP. So step one is, having something is better than nothing.
If you can’t find somebody to do it, my question is, why can’t you do it? Do you think that writing a little software code is something that you have no ability to learn? It tells me something about you, that you are not willing to try. You could find a friend who does know how to program to spend a couple hours with you and show you how to get going.
You could say look, this is what I am talking about, it doesn’t work yet, but it’s what I’m talking about.
I believe great entrepreneurs do stuff.
If you can’t do that and you are allergic to keyboards and computers and you’re just never going to code, that’s cool too. Some of these languages, by the way, are very easy to learn now, it’s not like learning a foreign language, you can get a lot of help from the editor, and there are various simple languages out there that you can learn how to prototype things quickly.
There are lots of coding classes available online, so my first question is, why aren’t you doing that? If you can’t get somebody in the world who has those skills excited enough about what you are doing, or you can’t make friends with somebody who can help you with that, that is also a red flag for me as an investor.
The answer to the question is like anything else, just do it. That’s why it is Nike’s slogan, it’s so great and really the easy answer to a lot of things. Plus, I’m an early stage investor, I don’t care if the prototype is presentable, it doesn’t have to blow me away. You just have to start the meeting and say look, I hacked this together myself, we need funding to hire engineers and obviously the user experience is terrible. You know it is terrible, but that’s okay. You’re self-aware, it doesn’t have to be beautiful and great.
I think doing attracts investors. Talking about doing makes me think maybe you’re not an entrepreneur.
For the second part of the question, I would take a quality over quantity approach. I would find someone who does know the investors that you are targeting and I would figure out how to spend time with them. For example, I would go to someone that they funded or someone that they have worked with and mentored before and say, will you help me with this? They are likely more available than the investor and I would use them as a way to create an introduction to the investor.
I would also suggest you read my blog post on DavidGCohen.com called Small Asks First. It’s about the idea of not over-asking, which is really important in entrepreneurship. You are trying to get to a resource, it is very busy, so get an introduction from somebody they know – it’s not that hard, and just ask them for something small.
Let me give you an example of something big – lunch. Lunch is very big – you’re asking them to go spend time with somebody they don’t know for an hour, which is an awkward situation, especially if they’re an introvert like I am. That’s a big ask. I know it feels small to you but it’s a really big ask to me. Coffee – huge ask. I have another blog post called Coffee or Lunch? that I wrote on this topic. They would have to go out of the office, meet you somewhere, and the biggest thing is, I don’t know you… it’s a big ask for a first ask.
Here’s a small ask – send me a paragraph or two of why I can be helpful to you, and the one really simple thing I can do to be helpful to you. I have another blog post that is called The Perfect Email. Somebody wrote me out of the blue, not even introduced, with enough context that I thought it was the best email I ever read and so I reacted to it. I ended up having an exchange of dialogue with that person; I even blogged about it. I don’t know what happened there, probably nothing huge, but hopefully I was helpful in some way.
I think the context of why you’re reaching out to me and asking for something that is easy for me to do is great, because going to have lunch is actually not easy to do – I’m busy, I’m introverted, etc. What is easy is asking me to click on a link and tell you what I think of the messaging on your website, the primary tag line or whatever. If I don’t respond to that, I’m just an ass. That takes ten seconds for me to do. It’s a small ask, it creates engagement, I can just click on the link, see what you’re doing, have to think about it for a second and then respond. Now, you’re actually starting a dialogue by making a small ask of something that is very easy for that investor to do. That is a great way to build a relationship and you go from there. You can do that at scale to figure out who is interested and engage more with those people.
Eventually, you’ll end up having lunch and a meeting.
At Techstars, we fully believe in the idea that no one is “too far along” for Techstars. Inversely, nothing is too early. Techstars has a program for every step of the entrepreneurial journey – from startup programs like Startup Digest, Startup Week, Startup Weekend and Startup Next to later stage offerings, including the accelerator program and venture capital for add-on funding.
Originally featured on grasshopper.
Ok, so you’ve got a business idea, and you’re working to make the dream a reality, but you’ve got to consider funding.
After all, you need money to turn your idea into something tangible. You need cash to pay your employees.
If the money isn’t rolling in yet, it’s tough to build a top notch product or service.That’s why many small businesses and startups look for funding and seek out investors.
Before you even begin to consider outside investment, consider how you can launch the company and get to revenue before you have to raise money. Although it seems hard in the short-term, it’ll be better for you in the long-run in terms of your knowledge of the process, and building your own equity.
So, how do you do it?
Why You Should Bootstrap
Bootstrapping means that you raise money without any help from investors. It’s how we got Grasshopper off the ground. If you can build your business without investors, do it this way.
You might bootstrap and keep your full-time job or quit and use your savings to get business off the ground. Begging your parents for money counts as bootstrapping.
Why bootstrap? You’ll retain complete control. That might not sound like a big deal, but when you’ve got investors’ hands in your company, you won’t be able to build the product you dreamed. Things get mucky when you’re playing with someone else’s money.
Here are some of our favorite resources for bootstrapping:
- Starting Up on a Shoestring | Inc. If you want to bootstrap your business, check out Inc.’s comprehensive list of bootstrapping articles. The list includes tons of stories of entrepreneurs who successfully bootstrapped their businesses.
- Bootstrapped, Profitable, & Proud | 37signals 37signals is famous for being both bootstrapped and profitable. They have a whole page dedicated to companies who didn’t take money from venture capitalists. Read Rework by founders Jason Fried and David Heinemeier Hansson for more info on bootstrapping.
- How to Bootstrap your Business | Entrepreneur Erica Ziela, founder and CEO of Sitting Around, explains how moonlighting helped her succeed. She also discusses how keeping her day job allowed her to pour significant cash into her business
- Bootstrapping Your Startup: 7 Hard-Earned Tips from Real Entrepreneurs | readwrite Real entrepreneurs offer tips and tricks on how to bootstrap a business. These leaders discuss what they’ve learned from bootstrapping, its benefits, and what bootstrapping can do for you.
If you can’t bootstrap, it’s worth learning a little about equity.
THE DIFFERENT TYPES OF EQUITY
- Equity financing is when you sell “shares” of your company to outside investors in order to finance your business. When you make money, your investors are entitled to a portion of the profits. This type of equity is best for sole proprietors who need some start up cash.
- Equity compensation is when you offer your employees a percentage of company profits as part of their compensation package, typically in exchange for a lower than average salary, or occasionally in lieu of salary completely. This type of equity is best for businesses that are in need of human capital more than physical capital. If you already have an office, a coffee maker, a copier, but need a new software developer, this might be the model for you.
As you get started, it’s worth understanding how to calculate shareholders’ equity, and it’s important to investors. To figure out your business equity, you’ll need to calculate the assets and liabilities of their business.
Start by determining the company’s total assets- these are things that are in progress, inventory, cash, or other receivables. You’ll also need to figure out your debts and liabilities, including salaries and accounts payable. To calculate equity, you can subtract the liabilities from the assets. Accounting software such as FreshBooks or QuickBooks can help you do this.
Too many young entrepreneurs become obsessed with raising angel and venture capital. When this happens, these folks lose sight of the real reason they became entrepreneurs – to launch and grow their company.
Remember that raising money is not a competitive game where you’re out to win. If you focus on the sport rather than building your business, you’ll undoubtedly end up on the losing side.
If you really have no option but to raise money, angels can be a good alternative to smaller VC rounds, but you want to make sure you’re working with the right investor.
Start by learning the three types of angel investors. Then pick the right one.
ANGEL INVESTOR #1: “I LIKE MONEY AND NEED MORE.”
There are too many of these “professional angel investors” out there, and they’re the worst. Their only goal is increasing their wealth. This type of investor is actually a person that wanted to be a VC, but couldn’t raise enough capital.
The reason they are so dangerous is that they have too much vested in the small amount of money they give to your business, which then leads to over-involvement and pressure on you for all the wrong reasons.
Should you take her money? No.
ANGEL INVESTOR #2: “I HAVE SO MUCH MONEY, I DON’T KNOW WHAT TO DO WITH IT.”
Every entrepreneur has met one of these investors: it’s the person who has already generated significant wealth and has no real need for more money, and can afford to be a lot less selective in funding ventures. They’re probably in the stage in life when they’re giving back, and part of that can be through angel investments.
This type of investor is ok if you’re looking for just money and maybe some general advice about the start-up process. But don’t expect incredible moral support or stellar advice from this kind of investor on a regular basis – he or she is likely over-extended in that realm due to their involvement in multiple ventures.
Should you take his money? Maybe.
ANGEL INVESTOR #3: “I’M PASSIONATE ABOUT A SPECIFIC INDUSTRY, AND HAVE TONS OF CONNECTIONS IN IT.”
This is the best angel investor, and a selective one, but the kind you should absolutely target. Why? Because this person already has money and isn’t looking to get involved in angel investing to generate more wealth as the ultimate goal. Instead, they’re hoping to serve as a true angel and really come through for your business by offering both funding and insight.
Best of all, she has clear passion for the industry you’re in, and probably the connections that will indirectly help you succeed. They’ll also have something money can’t buy: credibility in your industry and the connections to make good things happen.
Should you take her money? Yes.
Our advice is to look for angels that fall into either #2 or #3. Stay away from #1 no matter how desperate you get.
STARTUP INCUBATORS AND ACCELERATORS
Both startup incubators and accelerators offer seed money, expert mentorship, supplies, and office space to winners in exchange for a share of company ownership.
Giving up company ownership is a huge deal, and it’s not something you want to take lightly. However, if you’re looking for mentorship and a community, joining an incubator or accelerator might be a good idea.
The two are slightly different from each other. Accelerators usually focus on mentoring and refining as a company tries to go to market, while incubators are more involved in getting the ball rolling on making money.
Some of the most popular include Y Combinator, Techstars, 500 Startups, andCapital Factory, among many, many others. These are sometimes specific to certain fields (technology or entertainment, for example), and others will accept applications for all types of ventures.
Given how beneficial they can be, acceptance into incubators and accelerators is typically VERY competitive across all industries.
There are incubators and accelerators everywhere. Just check out this comprehensive list.
If you’ve got a co-founder or other employees that are riding the wave with you, set up a vesting schedule so that they get benefits once they’ve stayed for a while, not right away.
This protects you from any employees who want to jump on to get rich quick, then take off. With vesting schedules, these employees will only own a part of your company after they’ve stuck around for a while.
Cliff vesting – If an employee is part of a cliff vesting plan, they’ll become vested at a specified time (like after staying for 3 years) rather than gradually or incrementally.
Graded vesting – In graded vesting, employees get a certain amount of company ownership over a period of time. Graded vesting is different from cliff vesting because cliff vesting allows employees to become 100% vested after a shorter period of service
MORE FINANCIAL INFO
We know a lot about funding and investing, but we strongly recommend hiring a business lawyer to protect you as you go through these processes. Lawyers can help you sort out what’s fair and right as you hunt down money.
Sure, lawyers are expensive, but they’re worth it!
If you’re looking for more info regarding investors, financing, and equity, check out our Equity for Entrepreneurs: A How-to Guide. We dive in deeper there.