No matter how successful you’ve been with your earliest customers, growing and expanding your business requires money — money that you often don’t have. Even if you previously secured a round of funding to get your business up and running, you can’t necessarily count on your initial investors having the ability to keep funneling cash your way.
This means prepping to pitch your company to other Venture Capitalists to gain additional funding. But when your company is a relatively new, uncertain entity, you need to be ready to answer many questions from potential investors.
As Donna Griffit, a corporate storyteller and pitch consultant for startups explains, “It’s not enough to have a solid pitch. You need to be ready for the curveballs, to respond to the obvious, and not so obvious questions, and practice answering them just like you will practice pitching.” While there are literally hundreds of questions investors could ask, there are a few that are especially important when seeking a new round of funding.
- What Traction Do You Already Have?
“Traction can mean different things for different entrepreneurs,” Griffit says.
“Depending on your business model, relevant traction for your business isn’t necessarily just going to depend on raw sales numbers. The number of downloads or daily active users can be far more telling for an app or software tool. The number of returning users and repeat business can be a powerful indicator of your stickiness and the quality of your products or services. Your ability to demonstrate some type of traction is key for any investor.”
When asked this question, entrepreneurs should be able to provide quantifiable data that proves their company is headed in the right direction. Such statistics help illustrate your brand’s growth and its appeal with your target market. Investors want to see these numbers growing, not remaining stagnant.
But there is another piece beyond numbers, emphasizes Griffit: “Stickiness can be shown through customer love. Let them be your champion, gather adoring testimonials and show them on your traction slide as well, or interspersed throughout your presentation. This is undeniable value — and references for investors to follow up with as well…”
- What Is the Size and Value of Your Target Market?
The potential for your target market is another important consideration for investors. You don’t necessarily have to have an all-encompassing target audience. However, there should be enough potential in terms of audience size and the lifetime value of each customer that investors can feel confident in your growth opportunities.
“Investors want you to have a clear understanding of both the top-down available market and your serviceable obtainable market,” Griffit explains.
“There are other ways of looking at the Market Analysis as well: what are converging trends in adjacent markets that show your true value? What is the current annual spend on the problem or how much money is being lost by not having a viable solution? It’s not just calculating what you can make by taking X% of the part times your cost per customer. It can be looking at the current spend on partial or siloed solutions, showing clearly that your audience is willing and able to throw money at solving the problem — and with a conservative estimate, how will you take a bite of that market share?”
- How Do You Plan to Scale?
“Generally speaking, entrepreneurs seek additional funding when they feel ready to scale their business,” Griffit says. “But scaling is one of the riskiest stages for any company. Investors have seen this play out time and time again. They know that the risk is there, and they want to have confidence that you have a clear plan in place to mitigate that risk.”
To address this, you should come prepared with a detailed plan for how your business will scale over the next 12 months. This plan should account for your current sales cycle and customer acquisition strategies, as well as how changes like hiring additional staff will enhance these efforts. It must also show viable KPIs for the life of the runway.
“When an investor writes a check for this round, they are on the hook for the next round as well — unless they only invest in seed. They want to make sure that your objectives are attainable with the funding and impressive enough that they will want to join the next round and bring on additional investors in their network,” adds Griffit.
- Why Are You Seeking VC Funding?
“A lot of entrepreneurs get uncomfortable when asked why they are seeking investor funding in the first place,” Griffit notes. “But investors want to know why you’re asking for their help, rather than bootstrapping growth through your own revenue or other means. Perhaps even more importantly, they want to know what you plan to achieve with the money, and whether you think additional rounds of funding will be needed in the future.”
Answering this question can be a tricky balancing act for entrepreneurs. Illustrating how much cash flow is needed to break even, or the exact amount of money you believe you need to scale successfully, puts your finances under the microscope.
You need to show that your company is gaining traction while at the same time showing this doesn’t necessarily mean you have all the financial resources you need for future growth. Balancing your successes and funding needs during a pitch is key. Griffit goes on with words of caution: “Many Founders I meet see closing a round as the measure of success. It’s not. It’s validation for what you’ve done so far and a belief in where you’re heading and your ability to execute. So if you’re going to raise, be very clear on why you’re raising. The fact that there are seemingly piles of money thrown around is not enough of a reason.”
- Why Are You the Company to Do This? Why Now?
“This is sneaky,” notes Griffit, “Because many companies will answer with ‘great team,’ ‘unique, proprietary technology,’ but there is a much better answer. Follow the heat in the market. Look for trends happening right now that make you a very attractive investment opportunity.”Griffit goes on to suggest the type of trends investors are impressed to see:
“You can look for a shift in behavior — i.e. spending, work styles, COVID as a driver for new ways of living — but you must be able to back this up with stats, quotes and data. You can also look for regulatory or legislative changes — is there a new law coming up that will make your product an absolute must have? Another really great trend is to show investments and acquisitions in your space, yes even direct competitors. Putting this front and center shows that you really know your industry and what’s happening there and at the same time shows the interest in this space, which is a positive signal for investors. You just have to be able to prove your true differentiation, and why you should be the next big investment opportunity.”
Be Ready for Anything
As Griffit is quick to note, these questions are only the tip of the iceberg. Investors want to be sure that their money is well-spent and will bring them the coveted 10X or larger ROI. Naturally, this starts by making sure your business is operating successfully and showing the potential for even more growth.
However, by carefully considering how you can answer these and other pertinent questions, you will convince investors that you are worth their time and money. “Above all, keep your cool. Sometimes investors will purposely ask challenging questions to see how you deal with fire. You want to be able to take it in stride, answer to the best and most credible of your ability, and also know when to say ‘Great question — I don’t have all the data in front of me. Can I get back to you on that?’ It’s better than trying to make something up on the spot and getting caught off guard. It’s a true balancing act,” says Griffit.