If you’re going to start pitching your startup to raise capital, you should know that there are questions to expect from investors.
Investors of all types will want to know what your company does, why it’s worth their time, and how it could lead to a significant return and a large exit.
So before you jump into the shark tank (sorry), here are 9 questions to expect from investors about your startup during fundraising.
1. What problem are you solving?
The exact wording of your investor’s first question may vary, but your presentation will need to include a high-level explanation of the benefit your product or service provides.
More importantly, you’ll need to show an in-depth understanding of the market need you’re filling. That includes what you’re offering, but also the audience you intend to reach, how you’re going to appeal to them, and why this gap in the market hasn’t already been addressed.
This isn’t information that you’ll be able to produce out of thin air. Data and market research that validates your proposal will be crucial to determining the viability of an investment -- and, frankly, the long-term viability of your startup.
2. What have you achieved so far?
Questions to expect from investors are always going to cover what traction you’ve gained with your business or idea. This can include a minimum viable product or beta version, partnerships, pilot customers, testimonials, and other resources.
You can also mention any press you’ve gotten, especially if it’s a notable placement in print, online, or on TV. Buzz in the marketplace can create leverage that you can use to negotiate better terms for your financing.
This isn’t just about press or paying customers, though evidence of both can help. A smart investor may ask how you acquired those customers, for example, so you’ll need to prove that you can fill the top of your sales funnel and convert leads with your process.
3. How do you help your customers?
This question shouldn’t be a surprise. Market opportunity and early traction are important, but your pitch absolutely needs to include a story that explains how your product or service helps your customer.
You should be as specific as possible so that your potential investor can visualize the customer’s pain point and the solution you’re providing. Give your customer a name. Talk about her life and how it will be changed by your offer. And create a story that your investor will want to be a part of.
4. Can you explain your financials?
Investors can be swayed by compelling stories and driven leaders, but they’re also looking for a return on their capital. If you can explain how your company’s metrics will translate into future earnings, your funding conversations can reach a new level.
“The most impressive entrepreneurs communicate the value of their businesses through numbers,” Mark Patricof told Forbes. “A conversation centered on a company’s revenue growth, sales funnel, and customer churn causes an immediate connection with investors.”
5. How will you use my capital?
This question is really just the second part of the previous one. In fact, you can put these two questions together in simple terms. Potential investors are going to ask what you’re doing with your money, and what you plan to do with theirs.
Simple terms, of course, won’t be enough for your answer. You’ll need to explain how the capital will be used, whether that’s expanding your team, increasing your marketing outlays, or buying equipment. You’ll also need to demonstrate that your funding will cover costs, as well as if (or when) additional funds will need to be raised.
6. How are you mitigating risk?
Without due diligence, credible investments are hard to come by.
Investors considering your startup for funding will assess your business and plans to determine if the opportunity you’re presenting is legitimate. This review can include licensing and regulatory matters, real estate and physical assets, and intellectual property rights.
If you’re presenting your company to investors, they’ll expect you to be aware of these concerns. They’ll also expect to hear how you’ll address, mitigate, and compensate for those risks.
7. Why did you choose this problem to solve?
This is a question of motivation, both for you as the owner and your potential investor.
The “why” that keeps you going should be compelling, especially in the context of presenting your business. The problem you’re solving and the value you’re providing have to be fulfilling enough to keep you going when obstacles arise.
Your investors are also more likely to respond if they can empathize with your need to solve this problem. Investors’ goals will vary, so if you can find one that aligns with your mission as well as your product, your pitch has a better chance of resonating.
8. Why you and not a competitor?
Investors are looking for businesses that will be able to stand out from the competition. If you’re pitching “the next Facebook,” for example, you won’t get far without an effective differentiator that gives you a competitive edge over the current Facebook.
Also, investors aren’t just looking for the right ideas or market position, they’re looking for the right people. They’re looking for resilient, competent, driven leaders that will push growth.
You’ll be expected to prove that your leadership or management team is trustworthy and well-rounded enough to grow the business and make good on a potential investment.
And that includes a level of personal trust as well. Investors may want to bring in advisors to help your company grow, and they’ll expect you to listen. Cultivating open and collaborative relationships will go a long way in acquiring funds for your startup.
9. What’s the end goal for your financing strategy?
Angel investors, venture capitalists, and other backers are looking for unique opportunities and significant potential for growth. But these types of commitments aren’t meant to last forever. This is why investors in general, and startup investors in particular, are going to require an exit strategy.
You’ll need to clearly define when and how they’ll be able to recoup their investment and any related gains, sell shares, and conclude your partnership. There might be some give-and-take in the negotiation here, as you’ll need to ensure that the timeframe your investor wants is compatible with your business plan.
Answering Questions To Expect From Investors The Right Way
If you’re presenting to investors, remember that detailed and possibly intrusive questions are a good thing in this scenario.
You’re asking someone to devote significant resources to you and your idea, and you should be prepared for clarifications, interruptions, and tangents. Take these moments in stride. It means they’re interested.
Finally, having answers to these questions is a good start, but don’t stop preparing there. You’ll probably get many more detailed and technical questions about your business, especially if the investor knows your industry or market. Be professional, and use this opportunity to show your commitment to your solution.
GO Venture Capital can help you build your next big idea. Contact us now to get started.