If you’re launching a start-up, you might be looking for a smart and worthy venture capitalist to invest in your company. Well, you and every other startup! The best way to put yourself above the competition and make sure yours is the startup that is chosen is by knowing what venture capitalists are likely to ask before they consider investing in your company and making sure you have the answers to satisfy them when they do.
Here are the most common questions venture capitalists ask before they invest in a start-up.
Is this the next big thing?
This is probably the most important question a venture capitalist will ask. That’s because most venture capitalists are looking to invest in the next big idea. If your idea is flawless – if it is undoubtedly the ‘next big thing’ – then there is every chance you will walk into an investment, so you should think seriously about how you prove your start-up is a game changer.
Does the management team have the talent that’s needed?
The next thing a venture capitalist will want to know is if your management team has the skills, abilities and instincts needed to push the idea forward. You’ll need to prove that you are the people to do it. Having a good idea is not good enough on its own, your venture capitalist is going to want to know that their investment is in the hands of the right people.
Does the team understand the market?
Now, your venture capitalist is going to want to know that you understand the market. Where has it been, where is it now, and where is it going? They’re going to want to know that you know how to steer this project forward through the market and that you know enough about it to react to changes.
Do your research. Though your venture capitalist might not fully understand the marketplace, they’ll be able to tell if you don’t know your stuff.
You need to know whether you are entering a rapidly growing market, targeting a market in dire need of a new approach, or creating a new market, backed by a demand for something different.
You’ll need to know how you’re entering, steering and surviving in that market.
You’ll also need to know how big the potential market is. If nothing held back customer acquisition, what is the total addressable market? What is the total serviceable market? And what about your share of the market? How big is the market you can realistically expect to enjoy?
Financial projections
Perhaps you presumed this was the first question a venture capitalist would ask, but that isn’t always the case. There’s no point in hearing your financial projections if you don’t have a premium idea alongside the knowledge and the team you need to drive it forward. Once a venture capitalist knows you have all this, they’ll want to hear your financial projections, and they will want them to be comprehensive and realistic.
They’ll also want to know how you came up with that valuation, so it’s a good idea to get a professional involved to help you present the true figure.
Where will the capital be used?
Any investor is going to want to know what you plan to do with their money, and how their investment is going to help you reach your market and make a profit. You should be able to give detailed plans of how you plan to use any money you are given and tie these plans into your financial projections.
Your venture capitalist is also going to want to know what other capital requirements you will have, as they might be concerned that their investment will become diluted over time.
What is the exit strategy?
A venture capitalist is going to need to know what your exit strategy is. They’ll figure out whether or not this is realistic and determine if it fits in with their own portfolio.
Does it feel right?
You can’t answer this question, unfortunately. This is a question only the venture capitalist can answer themselves. Everything might seem up to scratch on paper, but sometimes venture capitalists have a bad feeling about an investment or a lack of passion for your idea, and decide not to go ahead. If that happens, try not to feel too disheartened. There will be other venture capitalists.
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