If you’re raising money for your company and you want to pitch to angel investors or venture capitalists, then there are a few important things to know that savvy investors care about.
I’ve raised close to $1 million for my previous startups and the following questions were not what I had expected to hear from the investors I was pitching to. I was expecting to be asked about my team, market segments, financial projections, go-to market strategy, exit strategy, etc. Don’t get me wrong, I was asked these questions – many of them – but it was the questions below that I wasn’t expecting.
It’s also important to note that the investors who asked the following questions are the ones that I ended up having the best relationships with.
You may never get asked these questions, or maybe not as directly as they are asked below, but you should be prepared and have answers to these questions as well as questions like these:
#1: Who believes in you and how can I get in touch with them?
What the investor are looking for here is who are your mentors and advisers. They like to know that there are people who believe in you, your ideas, your potential, and abilities.
#2: What entrepreneurs do you admire and why?
This is a fun question. Even if you’re not asked this question – work it into your pitch because you can tell a lot about people by who they admire.
#3: How do you track trends in your market?
Investors want to know that you are aware of your industry, as well as where you go to find data to stay on top of industry trends. Things change very quickly today, particularly if you’re in the technology business, so be prepared to share how you find data about your customers and industry, as well as how you apply those findings to your business.
#4: Can you tell me a story about a customer using your product?
This should automatically be included in your pitch presentation anyway. The best pitches are the ones that open with a story about how your product or service is helping your customer. Use real names and be as specific as possible about the “pain” that customer had before they used your product and how you’ve alleviated or addressed that pain. At the end of your presentation, it’s the stories they will remember, so be sure to craft an excellent customer story.
#5: How do you know how much money you need and could you scale your business with less?
All investors, of course, want to know how much money you need to scale your business, but you had better know: (a) what you’re going to spend it on (also called “use of funds”) and (b) whether you could scale your business with less money. If you could scale, how much less funding and what would you be sacrificing as a result? It’s actually a very good idea to have multiple budgets and financial forecasts developed in your business plan so that you can address three different growth models for scaling your business.
#6: How can I connect with 5 customers who have used your product or service?
If investors find your pitch interesting, they will want to begin what’s called the due diligence process. During due diligence they will ask a lot about your customers: who they are, how you know who they are, how you find them, what they think of your product, how they are using it, whether that matches your usage intentions, how you interact with them, etc.
#7: What will your market look like in five years as a result of using your product or service?
This is another opportunity to tell the growth of your company through sharing a compelling story. Paint the picture of your customers’ future as a result of using your product or service for five years. This helps show the investors that you’re able to envision and think critically about how your product and your customer will evolve over time.
#8: What mistakes have you made thus far in this business and what have you learned?
I’ve also been asked, “tell me about your biggest failure and what did you learn from it.” Either way, the investors expect business leaders to experience failure. Failure is part of the equation of growth and it’s where all of the great learnings come from. I’ve had two startups – one failed and one I sold. I learned far more from the one that failed – and I was able to take those learnings into my second venture.
I had one investor say to me, “I look forward to talking with you again in three months after you’ve secured those “beach head” customers, because I know you’re going to make mistakes and learn from them. So call me again when you’ve experienced those mistakes.” That was such a powerful statement to hear from a highly respected investor. It’s not just that she was giving me permission to fail, but she was giving me the confidence to get out there and call the CEOs of the companies I wanted to do business with. I knew that if they said no, I could move on to the next CEO and keep going until I found one to bite. And eventually I did! Then the real learning began and it was those gems that I’d report back to the investor. She was impressed by my perseverance, my confidence, and my ability to communicate my company’s value proposition in such a passionate way.
#9: What if three or five years down the road we think you’re not the right person to continue running this company – how will you address that?
Often times - particularly with high growth startups – the founding CEO does not remain the CEO who scales the company beyond the startup phase and investors ask this question to make sure you don’t have “founderitis.” Founderitis is when a founder’s ego gets in the way of the company’s growth and the founder refuses to (or makes it hard to) step down/step out of the position they hold. It’s really good to know what type of entrepreneur you are – as this will make it that much easier to know what you don’t know (another thing investors want to know you know). Knowing these categories gives you a vocabulary to discuss your strengths and your limitations.
It’s important to have people on your team with a combination of the following strengths and abilities. It’s also equally important for you to know where you fit into the mix, know what you don’t know, and be prepared to exit gracefully when the times come – because it inevitably will.
- The Idea Generator (You are the visionary, you come up with the great next big idea, your thoughts are not limited by what you hear from your peers, the media, the market, etc.)
- The Innovator (You can write code, build things, sew things, invent things, and create something for others to sell. Innovators are typically not the same people who sell what they create.)
- The Starter (You are great at creating a team from nothing and launching a new product or service. You know what it takes to write a solid business plan, implement and track that plan, research and respond to market trends, and surround yourself with people who are smarter than you.)
- The Changer (You are not only great at being a change agent, but you thrive from doing it. These people make the best “turn-around CEOs” – those who enter an existing company, access the situation, recruit change ambassadors, create a new bold plan, make tough decisions [close a business, fire people, hire people, discontinue a product, etc.], and re-position a company for optimal growth – and even sometimes dissolution.)
- The Grower (You are what I like to refer to as someone who loves “a diamond in the rough.” You see the potential in people, products and markets, and know whether they are worth investing time, money, and energy into improving. You typically don’t like starting new things; you prefer to take something good that someone else has started and turn it into something great. A talent desperately needed in most companies. This person can take a company from surviving to thriving.)
- The Exiter (You are someone who knows what it takes to position a company or person for exit. That exit is usually merging with another company, acquiring other companies, or taking a company public. This is a rare skill-set and these people are typically not the starters.)
This is probably my favorite question – so much so that I now ask this to people I’m interviewing. It’s one of those questions that makes people feel uncomfortable, but that’s not the intention of asking it. Rather, it’s to see how you respond to a challenging question, as well as learn more about some challenges you’ve experienced in previous jobs and how you communicate those challenges.
I had one investor tell me that he only invests in CEOs who have been fired from previous jobs. His rationale was that it showed him you were most likely someone who challenged the status quo and ruffled feathers. Now, I’m sure that’s not the case for everyone who’s gotten fired, but it does allow for a conversation about the type of employee you were for others and some potential mistakes you may have made earlier in your career, as well as what you learned from those experiences.
At the end of the day – investors want to invest in leaders who are movers, shakers, creators, and have the ability to inspire others.
I’d love to hear the atypical questions you’ve been asked by investors – please post them here.