What Questions Do VCs Really Ask Startups?

I remember when I was at school (for all you jokers out there, no, it was not that long ago) and I was studying French and Spanish. The hardest element for me was always the oral questioning element. Then one day, my professor revealed the questions ahead of time. Suddenly, the whole game changed and I could approach the process with clarity and positivity. So I thought I would do the same for founder conversations with VCs and the standard template that most investors run through with founders. *Personal notes in italics.

1. Team

·       Who is your team? What is their experience (VCs like logos, it gives them confidence. No one ever got fired for buying IBM!) Why have they chosen this problem to pursue?

·       Who are the 2-3 key hires you need to make for the company?

·       How do you plan to scale the team in the next year? What do you want the culture to be? How do you look to retain that culture with the scaling process? (What specifically will you do to retain this?)

·       Why is your team uniquely qualified to solve this problem? What unique insight do you have?

2. Market and business model

·       What problem are you addressing? What is the process to solving this problem?

·       What is your business model? How will you make money? What is the size of your market? (This is the market from which you will extract direct value. Please be as specific as possible. It is a misconception VCs like huge markets. I like founders that present tiny market opportunities with expansion opportunities available.)

·       What is the current solution and who are the competition? What is your competitive advantage? (Why will you beat them?)

·       What fundamental changes (infrastructure or societal) mean now is the right time for this problem to be addressed?

·       What is the market structure and dynamics? How do these dynamics map against your strategy?

·       What are your customer unit economics (CPA, churn, LTV. For guidance, a 3-1 LTV/CAC ratio is the minimum. I always look for 4-5.)

3. Product

·       What problem are you solving? More importantly why do users care? How does your product change the current work flow used by people feeling this pain point?

·       What are your major product milestones that are coming? What have been the big learnings from the early versions and feedback of the product?

·       What are the 2-3 key things your product lacks?

·       Product demo - show me a demo

·       Product traction. What are the key metrics of use of the product? How have the numbers been changing recently? Are there any inflection points? What are the catalysts for this?

4. Distribution

·       How are you going to get your product into users hands? Is this an SEO, SEM, viral, radio ads, direct mail, PR, other based business? (The best network effects are those that have, dare I say it, inherent network effects. Think LinkedIn, eBay etc etc.)

·       What is your customer acquisition costs (CAC) and average revenue per user (ARPU)?

·       What advantage if any do you have for distribution? (This is particularly important for me as I believe traditional publishing platforms is now a “pay to play model”. The more cash you plough in, the more you get out. Therefore, I look to circumvent the traditional publisher > retailer hegemony and build a direct relationship with customers where you own that relationship.)

·       How has distribution worked so far? (If at seed, provide evidence from a small cohort, micro-test. YOU MUST COME WITH SOME DATA.)  What has worked/not worked?

·       What do you plan to do next for distribution?

5. Fundraise and financials

·       How much runway will the capital give you? (If you say under 18 months, I start to get nervous. I am not quite Jeff Clavier in long term thinking but if there is sufficient liquidity, aim for 24 months).

·       How much dilution will you give up?  What is your pre-money target range? (Founders, if you do not know pre and post money valuation meaning, not to worry but buy this and you will learn fast.)

·       What will you use the capital you are raising for? What product milestone will the capital get you to?

·       What are your basic financial projections? Do these match the prior discussions on growth and traction? (Do not allow for growth and traction reports that do not align with financials. This creates an atmosphere of distrust and hesitation on behalf of the VC).

6. End game

·       If all the stars align, what is the ultimate outcome? Does this outcome excite me? (I was recently pitched hairdresser software. If all the stars align it will be used in every hairdresser in the UK. This does not excite me.)

·       Does the founder want to work with me? (If so, time to make some mojitos!)

I think for me it is always extremely important in initial conversations to build a strong sense of rapport with founders. This is our first date and I want them to like me. With that in mind, I look to integrate this framework in some sense or another into the natural conversation flow. This should not feel like a Q&A. The best pitch is a discussion. Founders remember, the VC industry would not exist without you. Enter the conversation with confidence and passion for your business.

 

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