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The hows and the whats — 5 tough questions VCs ask
Over the past six months I have spoken with a wide variety of people who have shown, in varying degrees, interest in investing in my company. Many of these VCs have specific ways that they conduct a call, interview or meeting. Many of them have lead me down long and wasteful due diligence processes, many have been kind, some have been blunt and harsh but all have been pedantic and specific about the types of questions they ask.
I have found that, on the whole, the questions are standard and the steps straight-forward but there are always the tough questions that pop up and catch you unawares. In the beginning those questions were plentiful as I didn’t really know what to expect. But as I have progressed I have learned to identify the “right” answers, the times I need to push back, and that ultimately the best answer is the truthful one.
Here’s my list of five tough questions that I’ve been asked by VCs:
1. How are you changing the world?
This is a difficult question to answer and one that you must have an answer prepared for. VCs are increasingly looking for products, services and companies that are more than just money-makers. They want you to be conscious of your environment, the world and the effect you have on your surrounding. So make sure that you have a real, truthful and sincere answer.
Mine involved a level of honesty around our product: we’re not curing an incurable disease. We help people to connect with other like-minded people. That’s what I said, but don’t lose sight of the revenue — if you want to save the world, join an NGO.
2. How much money are you looking to raise?
The reason that this is a difficult question to answer is that there are multiple answers that are right for your business. The first thing that you need to know is how much money you are looking for. Simple. Next is: ‘in what currency are you having the discussion?’ You might be talking with VCs in Germany, the USA, Israel, South Africa or anywhere.
The next key part of this answer is knowing your audience. This is a lesson to learn for everything you do moving forward — know who you are talking to. If you are in front of an Angel investor you need to know what their roof and floor are. Don’t ask an Angel for US$20-million (that’s an institutional money number). In the same breath, don’t ask an institutional investment firm with a US$5-billion fund for US$500-million. Yes, some may give you the money, make an exception and get you on their books, but that is rare.
There is no one size fits all here, but it’s imperative that you do your research and know who you are talking to and how much money they normally invest.
3. How are you going to use the funds if you get them?
Be sure to have a very clear, concise and relevant answer for this Pandora’s box. If you are too vague it will appear as if you don’t have a plan and are wasting the VCs time. If you are too specific it could imply that you are too focused on the details and missing out on the big “billion dollar vision”.
4. What do your financials look like to date?
Many business owners will laugh at this question but the truth is that many startups don’t keep a good set of books. Be sure to explain the ebbs and flows and highs and lows. It’s not as simple as “We’re doing good” or not.
If there is a red month, be able to explain it. If there’s a leap in profit you’ll need to justify that too. Most VCs won’t expect pristine accounting but a good sense of your monthly expenses, income, revenue sources and burn will do.
It is also incredibly important to get a good understanding of the financial terminology and how you use it. Don’t talk about revenue if you mean profit, understand how you calculate your expenses, what a cost of sale is and how to tally all of that up in to a coherent paragraph about your business.
5. What is your US strategy?
As an emerging markets company this question is a potential minefield of trouble. If you answer incorrectly you will lose the VCs attention. If you answer too correctly then you open yourself up to much badgering and deeper technical questions like the location of your IP, whether you are interested in moving to the States permanently, if you have ever rolled out a product in the US market before and how your go to market strategy will work and what it will look like.
Give it a lot of thought. Do you want to live in A,B or C country? Why are you raising funds there? What is your market strategy and how do the laws of that country affect your business?
Having spoken to many, many VCs, Angel investors, “Super Angels” and other types of investors and business people, I do have some closing thoughts that I keep in mind all the time.
First, be truthful. Don’t lie. Brains before bullshit. Do not lie.
Second, be transparent. Don’t hide the fact that you have tattoos, a beard and swear (if that’s what you do) and don’t hide the fact that you had a rough four months but learned a lot of good lessons (if that’s what you’ve been through). Embrace those things, they define who you are as a founder and what your company is becoming over time. VCs want to see the company for what it really is.
Lastly, be sure that you are raising money for the right reason and you explain that. Don’t raising money to spend it, ever. Raise money to grow your business and create revenue that will last and grow.