Questions to address before raising capital


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.

  1. 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.
  2. 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).
  3. 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.
  4. 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?
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. What is your monthly burn rate? This better match up with question three, how long the raise will last!
  12. 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.
  13. 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.
  14. 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.
  15. 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.
  16. 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.
  17. 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!


Always the more beautiful answer/who asks the more beautiful question


I’ve been a devotee of the Socratic method for many years and have found it especially useful in mentoring founders. So I was excited to find what appeared to be an entire book about the power of questioning: A More Beautiful Question by Warren Berger. The good news is that the first 75 pages or so do focus on the power of the question and why it’s so important in our time of accelerating technological change and complexity. Unfortunately the rest of the book degenerates into the typical business book pastiche of a zillion quotes from people you’ve never heard of and endless variations on the author’s main themes. What would have made a great long form article on Medium, The New Yorker or Vanity Fair has gotten inflated into an entire book. That being said, I still recommend the book, especially, for educators, as Warren Berger focuses a great deal of his attention on what’s wrong with today’s (and yesterday’s) education system: a focus on memorizing and regurgitating facts as opposed to learning how to ask important questions. I found myself underlining sentences multiple times per page – there are great quotes and stories about the power of the question. (Do yourself a favor and buy the paperback or the Kindle edition and save yourself some money.)

One story which I particularly like, though it may well be apocryphal, is the story about Einstein. He said that if he had an hour to solve a problem and his life depended on it, he’d spend the first fifty-five minutes making sure he was answering the right question.

Clayton Christiansen observes that questioning is seen as “inefficient” by many business leaders, who are so anxious to act, to do, that they often feel like they don’t have the time to question just what it is they are doing. I’ve found this especially true of founders with their bias for action and strong sense of urgency.

Berger offers a powerful definition of a beautiful question:

An ambitious, yet actionable question that can begin to shift the way we perceive or think about something – and that might serve as a catalyst to bring about change.

Another important insight that resonated especially well with me was that “questioning often has an inverse relationship to expertise – such that within their own subject areas, experts are apt to become poor questioners. Frank Lloyd Wright put it well when he remarked that an expert is someone who has “stopped thinking because he knows.”

Most people are reluctant to ask question for two reasons: one, that they may appear stupid, or more precisely ignorant;  and two, that they may appear to be questioning authority, which might endanger their career prospects. When I unexpectedly found myself in the personal software industry in 1980 with only a light hobbyist knowledge of computing and surrounded by MIT educated software engineers, I quickly learned that if I didn’t ask questions I would never learn what I needed to know. And in fact no one considered me ignorant for asking questions and sometimes my non-expert questions even catalyzed discussions amongst the expert engineers.

My most powerful takeaway from Berger’s book, the insight that is most relevant to mentoring founders, is that it is not the questions I ask the founders that are so important, but that I help them learn the power of asking questions themselves, of their colleagues, the world around them and themselves. As Leon Bernstein, president of Bard College, is quoted on the power of questioning: “… the ability to question not only other people’s views, but one’s own assumptions.”

As Jay Ito, head of MIT’s Media Lab said, “you don’t learn unless you question.” And as I’ve posted before, startups are learning machines – experimental labs where the founder forms a hypothesis, designs an experiments to gather data to test the hypothesis, and then modifies their thinking based on the results of their experiment. Iterate until true.

I could go on quoting salient sections of Berger’s book and quotes from the many people he has spoken to or read about, instead I recommend you buy the book and make these discoveries for yourself. And perhaps, unlike me, you may even find the latter chapters as valuable as the first.

Product or Company?

As a mentor at MIT Venture Mentoring Service, I very often see entrepreneurs at the concept stage. One common issue I have found is that often they aren’t clear in their own minds if they intend is to create a product or build a business.

Often it’s one of the first questions I ask them, because this basic decision will have a great influence on the myriad of other decisions they will need to make if they decide to build a business.

With all the tools available today to developers one person can develop an app or other product themselves, and fairly quickly, without much capital. And there is nothing wrong with that ambition. Products can be sold or licensed to other companies, that can take on all the responsibilities for making the product successful, including sales and marketing, customer support, maintenance and enhancements, and much more – freeing the entrepreneur to focus on creating new products or services.

The bottomline is: if you want to build a company you need to think as much or more about building your team as building your product and acquiring customers. And virtually all VCs will tell you that they invest in teams, not in products. (I believe Don Valentine is one notable exception to this rule.) The common wisdom is that VCs will take an A team with a B plan over a B team with A business plan, because plans seldom become reality and an A team can pivot successfully, a B team can not.

Organizational design, recruiting, and compensation plans are key to building teams and topics for another day.