What are the typical questions investors will ask entrepreneurs? What investor questions do you need to be prepared to answer when you are raising money for your startup?
It is one thing to put on a bold presentation or to create a beautiful pitch deck. Yet, it can be quite another to be able to ensure that holds up to investor scrutiny and to check all of their boxes and investment criteria.
In order to ace the fundraising process, and carry it through to putting the money in the bank, in an efficient way, you must also be prepared to answer the questions prospective investors are going to have.
The Ultimate Guide To Pitch Decks
Here is the content that we will cover in this post. Let’s get started.
- 1. Preparing For Investor Questions When Fundraising
- 2. What Investors Want & Need To Know
- 3. How Big Is This Market?
- 4. How Have You Proven This Problem?
- 5. Why Is This The Right Team To Back In This Space?
- 6. What Are Your Challenges?
- 7. Who Are Your Main Competitors?
- 8. What Is Your Competitive Advantage?
- 9. What Have You Proven To Be Able To Achieve?
- 10. How Fast Are You Growing?
- 11. What Is Your Marketing Plan?
- 12. How Will You Use These Funds?
- 13. Why Is This The Right Time For This?
- 14. Where Is Your Company Headquartered?
- 15. What Are Your Profit Margins?
- 16. What Is Your Burn Rate?
- 17. How Much Financial Runway Do You Have?
Preparing For Investor Questions When Fundraising
In order to be the most successful and efficient in fundraising, entrepreneurs need to be prepared to answer questions from investors.
You do not want to be caught off guard by common and basic questions. You don’t want to be uncovered for not knowing enough about your business, investor needs, and fundraising. Nor to be trying to wing it on the spot.
You need to know what you will be asked. With a little research, you can be prepared. Clearly, if you are asking so much from investors, it only seems to be the right thing to invest in this part yourself. It will make you much more educated, knowledgeable, and effective. Investors will notice this and value it. Which can greatly increase your ratio of positive pitches, and help you land the best investors. It may also go a long way toward receiving more attractive term sheets.
Ideally, you will preempt many of these questions before they come up. This will make things go much more smoothly. Fewer questions mean fewer detours, less time lost, and a better likelihood of closing the pitch.
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If you can answer them in advance in your pitch deck and other fundraising materials, presentations, or in investor meetings as they further vet you you’ll enjoy the fundraising process a lot more.
So, gather questions and objections, and work them into your pitches, build your FAQs with them, and prepare answers for meetings in advance.
What Investors Want & Need To Know
Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
These are the basics of what experienced investors will want and need to know about in order to make an investment decision. If you can’t answer them on the spot, or leave them unanswered in your pitching materials, you are decreasing your chances of getting funded.
How Big Is This Market?
One of the most important things for startup investors is the size of your market. So, you can expect that one of the typical questions investors will ask entrepreneurs will center around this facet.
If you don’t have a big market, and the potential to become a very big business, then your company probably isn’t a candidate for venture capital.
In order to compensate for the big risks they are taking by investing in startups, they have to demand equally big returns. For a company to be able to deliver on that, they have to have the ability to grow many times larger than they are.
Companies are now not only running into the billions, but tens of billions, and over $1T. Be sure you are thinking just as big.
Be ready to answer not only how big this market is as a whole when you zoom out, but how much it is predicted to grow in the years ahead, and how you will start making progress by zooming in to win a foothold in it.
Be sure that you can quote some credible and authoritative sources for the statistics and data you are providing.
How Have You Proven This Problem?
The problem is the foundation of your entire company. So, you should not only have proven that it exists but have great clarity on exactly what it is, as well as what solution is viable.
Great startup companies are frequently born out of points of frustration that entrepreneurs have encountered in their work or personal lives. You should be able to tell a relatable story around that, which will resonate with and be understood by investors.
Then you should be able to answer how you have further investigated and proven this problem. What research have you done or commissioned? How many target customers have you surveyed and talked to to verify it, and gain more depth of understanding about it?
You may even wish to share what you’ve learned about the features or processes, and talk about the benefits that these people or businesses have said will make them try a new solution.
Of course, two of the best validations are that they already have a budget to solve this problem, or are paying you for it.
Why Is This The Right Team To Back In This Space?
After taking on a good problem in a big market, backing the right team is a top consideration for startup investors.
Why should they back you in this space as opposed to one of your competitors? They want and need to win this space. So, they need to back the best.
Poor management and execution can waste any amount of money plowed into a startup. Even if that is tens of billions of dollars. Whereas great entrepreneurs can turn even a little into big results.
That’s even if you can make it that long. The reality is that entrepreneurship is tough. It is really a founder’s job to tackle a barrage of brand new challenges each and every day. Not everyone has the grit to handle that and keep going at it for what may easily be five to 10 years before an exit.
So, you should be prepared to demonstrate why your team is fundable. What is your expertise in this domain? What business experience is on your leadership team? What have you persevered through before that shows you can take it until you make it? Be prepared to answer these typical questions investors will ask entrepreneurs.
What Are Your Challenges?
Entrepreneurs love sharing and shouting about their strengths and the things that they have done well.
What most shy away from is not just admitting their weaknesses, but the challenges they are facing, and what they are struggling with.
That doesn’t help anyone. It doesn’t help you and your company. It doesn’t help investors, or their ability to help you.
Investors want to know that you understand your own business, market, and threats. You can only do something about it if you know.
Secondly, with this information, they can see how they can add the most value to your startup. For example, they may be able to help you find key talent or open doors with suppliers and distributors.
Who Are Your Main Competitors?
If you are working on something with value, you will have competition. Ignoring that is dangerous for you and your investors.
Even if you have conducted thorough market research and have determined that you don’t have any direct existing competition, you should be alert to who will become your competitors. Not just so that you can stay ahead of them, and defend against it, but as they may even become potential acquirers who can provide you an exit.
If you do have existing competitors, they can provide validation for your own startup. It shows that others believe in this problem, and create a solution for it. It may even provide some benchmark to support your valuation and the amount you should expect to raise at this stage of the journey.
What Is Your Competitive Advantage?
It is fine that you have competition, as long as you have a sustainable competitive advantage.
There are many ways that you can take advantage of a moat around your business. It may be expertise, high barriers to entry, technology or other IP you already own, or something else.
What Have You Proven To Be Able To Achieve?
It is easy to be passionate, have big goals, and make big claims about what you hope to do. Executing and delivering results can be a whole different story.
The ability to focus and execute and achieve tangible things is what makes all the difference between successful entrepreneurs and startups that create value, and the rest.
You can demonstrate how you are one of the winners by sharing specific milestones you’ve achieved.
If you have outperformed industry benchmarks it is worth mentioning these data points as well. Prepare your answers well for these typical questions investors will ask entrepreneurs.
How Fast Are You Growing?
Growth is a great way to show that you can execute and achieve things. Investors want to see that you are moving in a positive direction. It is one of the key metrics that they will evaluate your startup on.
Different levels of investors may have different expectations or criteria. The younger your startup, the faster they want to see you growing. Often on a week-over-week basis.
You should also be able to show the ability to drive consistent growth. That doesn’t mean business will come organically and naturally this way. You have to show you can make the extra pushes when you need to.
What Is Your Marketing Plan?
Your marketing plan will tell potential investors a lot about you and your venture.
It will show if you really understand business and marketing, if you are making the right choices for your product, if you are spending your funding wisely, and if you are just trying to DIY it versus getting expert help in critical areas.
This will also speak to your profit margins, how sustainable your business is, and what your customer acquisition costs are.
How Will You Use These Funds?
Founders put a lot of effort into thinking about and pitching to get the money. Though maybe significantly less about how they will convey how they are going to best put that capital to work for the greatest returns for the investor.
You don’t have to drill down into every dollar and line item. Though you should explain the main categories you will put this money into, why that is the best decision, and what it will yield.
Are you ready for more in-depth information on the questions investors will ask you after reviewing your pitch deck? Check out this video I have created where I explain in detail what to expect.
Why Is This The Right Time For This?
Timing can be hugely important for startups. Especially for those working on new markets and technology. You do not want to be too early or too late for the party.
First mover advantage can be beneficial. It can also make things much harder. Especially in having to educate investors and customers, and convince them of this first.
Being too late can make it more competitive and expensive, while much of the value has already been extracted and won.
Why is this the ideal time for your startup? More importantly, why is this the right time for them to get involved? Have your answers ready for these typical questions investors will ask entrepreneurs.
Where Is Your Company Headquartered?
Having a fully remote and distributed workforce may be the most efficient, productive, and profitable way to do business today. Yet, where you incorporate your business and base it can make a difference to investors.
Some may still be grappling with the reality that equally great and successful startups are born, funded, and grown outside of Silicon Valley
Your location can also have regulatory and tax implications.
What Are Your Profit Margins?
Investors want to know if they are realistic, sustainable, and big enough.
What Is Your Burn Rate?
How much cash is your startup burning through each month?
This will indicate your philosophy on running your startup, how much is really needed to make a difference, and how long they might expect their investment to last.
How Much Financial Runway Do You Have?
Based on your burn rate and spending plans, how much more runway do you have in the bank?
This will tell investors a lot about your money management and fundraising abilities. As well as how desperate you are to close this round. The less pressure you are under, the more power you will have in negotiations.
Prep your answer for these typical questions investors will ask entrepreneurs, and you’ll maximize your chances of getting funding.
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