You will undoubtedly be faced with a number of questions from the investors you meet with, even after you present your pitch to them. Here’s some you might encounter that you should be prepared to answer.
- Why are you raising capital now? The best answer is that you have nailed the business model and you are ready to scale this business.
- How much are you raising? This depends on the investor (angel, angel group, seed investor, VC, corporate VC etc.) You need to match the amount you need with the type of investor – i.e. don’t expect an angel to invest $2 million (way too much), nor a typical VC for $$50,000 (way too little).
- How long will it last? Generally your raise should last 12 to 18 months. Raising capital is extremely resource intensive and distracting so you don’t want to do it until you have to.
- What milestones will it enable you to reach? Milestones nees to have operational definitions – meaning they can be measured. Investor money is rocket fuel, so they need to know does their money fund lift off or will you actually get into orbit?
- How close will it get you to break even/cash flow positive? This tends to be more important to angels who are not nearly as patient investors as VCs, who are used to doing three or more rounds before a liquidity event.
- Do you expect to raise further rounds? If so, when? How much? Investors are investing the the future, not the present, so painting a clear picture of your future is vital to raising funds. Being realistic about how much money your will really need vs. how much money you’d like to need is critical.
- What are use of proceeds? In other words how will you spend the money? The best answer is on revenue generating operations, such as hiring more sales reps. But like milestones, use of proceeds needs to be clear, compelling, and measurable. They need to add demonstrable value to the company.
- Who is your ideal investor? Why? Are you a first time founder who could benefit by coaching or a serial entrepreneur who is looking for the best terms? Not all investors are created equal, so knowing the type you are looking for narrows the field.
- Why type of investment are you trying to raise: convertible note? equity? royalty-based? other? Early stage companies are generally best served by convertible notes. But if you are raising seven figures you will probably end up selling equity.
- Have you raised “friends and family” money? If so, how much? Investors, especially angels, like to see if you have skin in the game (as if working 90 hour weeks and living on ramen isn’t skin in the game!) Outside capital of any kind is validation and is seen as reducing risk for other investors.
- What is your monthly burn rate? This better match up with question three, how long the raise will last!
- What’s the deal flow in your segment? up or down? how much invested in past year? this year? Before starting to raise capital you need to know the current investing climate for your type of company in your market. This varies year by year and will greatly affect your strategy. Some years it’s a founders’ market, other years it’s the VCs in the drivers seat.
- Do you have revenue? If so, how much per month? Growth rate? Customers and revenue are the best validators of any business idea and investors want to put their money into scaling, not trying to find your first customer or figure out what your business model is. The days of raising capital with just a PowerPoint are largely over.
- Have you talked to investors? What’s been reaction/feedback? It’s very wise to get to know investors and garner feedback as soon as you start your company and well before you actually start to raise capital. Getting a meeting with a VC for a new founder, for example, can be difficult, unless you’ve gotten to know them from conferences, demo days, through mutual friends, or other means.
- What would make your company a better investment? less risk, higher reward. Investors don’t like risk, so how can you show that you have reduced risk in the three key domains: technology, market and management? Equally important is upside. Investment is a hits business like music or movies. The few hits pay for the many losers. So you need to show evidence you’ll be a big hit.
- If in 3 – 5 years your company failed what would be the major reason why? No early stage company is complete and assured of success. Being aware of your weaknesses will show investors that while you may be confident you are not arrogant and realize where you need to strengthen the company.
- Who do you want on the board? Board seats are very valuable. Generally speakers one to two founders – no more – get board seats. VCs expect at least one board seat. Avoid giving angels board seats unless they are super angels who can add credibility and wisdom to your board. Keep your board small. You may end up with the CEO as the only board member from the company.
Preparation is the key to raising money – know your market, your company, the investment climate, the investors you are targeting, your competitive advantage … knowledge is power!