Deal questions for startup fundraising

Fundraising deal questions: What venture capital startup interview questions will be asked

 This is the third part of a series of venture capital startup interview questions. We cover almost every question an investor will ask you when you are pitching to raise money, so you are totally prepared.

Unlike resources on the internet that just provide a few questions, this resource is unique as:

  • We provide the insight into what the questions actually mean (They can be sneaky)
  • Almost all the questions you will be asked, rather than just a few indicative ones
  • Examples of what to actually say!

This instalment is on your fundraising deal questions. There is no way in hiding from these investor questions! You are guaranteed to be asked most of them. The tough thing is this area is not simple and you simply have to dedicate time to have a good answer. It’s only resources like this or the alternative of learning the hard way that you will learn how to answer! Learning by failure is for dummies. If you read all of these and do your homework, you should be able to deal with every curveball thrown at you!

We need feedback to make this as useful as possible. If there are any questions we may have missed or improvements to answers, sound off in the comments so this can get better for all founders, and even investors looking to build up their knowledge.

If you want to get updates on each instalment and to get a PDF version of the fundraising deal questions, download the PDF here, and I’ll email you when the new questions are up for you to be a total pitching pro.

Download the fundraising deal questions and get updates on new Q&A

 


Fundraising deal questions

Question: How much are you raising?

What they meanpitch deck

This is one of the most common and basic questions that every investor will ask you, even if they are not that interested. This is such a relevant question because it dictates whether or not the investor can even invest in you at all. You have the potential to look pretty stupid if you are pitching a seed stage investor who normally invests $500,000 and ask them to invest in your $20 million Series B round. This shows that you did not do any preparation to understand the investor; I’m surprised that you got a meeting in the first place!
But let’s say you are looking to raise $1.5 million and the investor normally only invests $500,000. They now need to think if they have the capital or dry powder to be able to participate in this round. If they are normally a lead investor than their $500,000 may not make them a strong lead, so they may end up having to be a follower instead, which may not suit their business model and brand.
Once you answer this question, everything else can be linked back to it in some regards, so it acts like an anchor. The next question, of course, will be, if you are raising $1.5m, how are you going to spend the money. Your marketing plans, who you want to hire etc are all linked to this very important number.
So fundamentally this question serves to see if you have done the most basic of preparation and gives food for thought for the investor as a basic filter.

What you need to say

You need to have given this some serious thoughts. The amount you raise at this round needs to be just enough to get you to your next round of funding, or even profitability (Especially if you are in Africa!). A VC-funded startup is a game of pass the parcel. Each round you raise large amounts from different investors, and the previous investor only cares about you living long enough for the next investor to buy into you.

This is a great question, let me tell you how we thought about this. We want to have a runway of 18 months so that we have 12 months to execute with our heads down and six months to raise with some buffer. We are doing $100,000 MRR at present and the revenue milestone investors expect at series B is $300,000 MRR. According to our hiring and marketing plan, with our assumptions on CAC and customer retention, we need $2.5m for hiring and $3m for marketing. G&A should be around $1m on that hiring plan. Adding a buffer of $1m, our base plan is $7.5m. We have developed scenarios for a downside and upside case.

We think we have a strong product-market fit so we can comfortably raise $12 million and spend it properly with a good RoI. We are feeling out the markets with investors to understand what their appetite is and the kind of aggression they would like to commit to. We would love your thoughts?

Question: What will be your use of capital? How will you spend it?

What they mean

Literally, how are you going to spend my money and why?

If an investor is going to give you money they very much care about how you’re going to spend it. Yes, you’re going to complain that investors think you have a crystal ball and can see into the future and become preoccupied with the exact number. Your numbers will be wrong, they will never be right. The key thing is that they can look stupid, and this is what you want to avoid.

You very much need to know what you are going to do with every Dollar (broadly!). VC cash is super expensive, so you better need it for a reason. Otherwise don’t raise!

Your financial model exists to show that there is logic as to how much you’re going to spend and where specifically and when. You add commentary as to why? Your financial model can be very important. Read this for more.

Since you will never be sure how much exactly you should raise and how much you can raise, it is best to think of the upside and downside case for the amounts you can raise. Pick a baseline number you are pitching and discuss around that. Don’t make it sound like you picked a number out of the hat. Your number came from a financial analysis and what you need to achieve defined milestones.

Understand that raising is a game of pass the parcel. Your angel may not fund your seed, and your seed may do pro-rata, but they may not be able to lead your A round. Your seed investor almost certainly won’t lead your B-round, unless they are huge like Sequoia. You need to think critically about milestones and positioning yourself to raise. Say, in SaaS. the magic ARR number is $1.5m to get an A-round. You have to do that. So when you are communication how much you are raising you can be an insider and say ‘we know we need to get to $1.5m ARR at our A. You agree? Therefore our execution plan will ensure we get there or exceed that. Anything lower will jeopardise that.’

I typically recommend that you go to investors asking for less than you actually want (the min you need) to make sure that you can actually raise the amount you asked for. You can often raise more than you asked once investors like what you’re doing and see the compelling logic of you growing faster by raising a larger amount. You, therefore, need be prepared for how you will spend that $500,000 you need and that million dollars you want.

I was raising money for a startup in Asia. The founder wanted around a million. We asked for $500k. Once investors got interested they actually said ‘you know what, you could achieve a lot more if you raised more money!’ We agreed. She ended up raising around $1.7m.

In the 50Folds financial model templates, there is some fantastic source and use charts to help you answer just this question. There is also a free source and use runway calculator.

There are always only three buckets to communicate: staff, marketing and other (typically your G&A). If you are tech heavy, then you might have a fourth box for developers. If you need to get into more details about how you are spending cash, I wouldn’t answer directly, I would talk about the drivers such as you need more marketing spend with a CAC of x$ and this will get you y customers, therefore you need to hire more customer success staff and care to support the users, as well as maybe the server costs etc. Make it seem like you are doing a model in your head and you know how everything is connected! You do not need to talk about your SaaS spend and the number of pencils you are going to purchase. Don’t bother with that level of detail when modeling your financial model.

What you need to say

“Let me tell what the key drivers are of our business. We deliver a fantastic product by hiring exceptional developers who are typically not the cheapest of people these days. The more features that we are able to integrate into our product, the larger the addressable market size.

Our primary go to market strategy is via paid marketing, specifically SEM. We, of course, build in referrals to get earned customers, but we are going to scale through that channel. Our customer and revenue growth is therefore proportional to the amount that we allocate to marketing spend.

As for any startup, there are always trade-offs; should we be spending more on the product, or should be spending more on marketing. There is no point in spending a lot on marketing if we don’t have a great product and there’s no point in having a great product if no one finds it!

If you look at our sources and use chart you can see that we spend approximately 30% of funds on developers, 40% of funds on marketing and 30% on G&A. Our G&A base is relatively stable so we flex additional funds raised to marketing and product depending on the raise.

Our base plan will get us to $1.5m ARR with a churn rate of 2.5% monthly. We think that our raise will get us over the mark, but we would like to have more than our minimum to make sure we are attractive so the raise happens.

Our current plan requires a $500k raise, but we clearly have plans for what can be achieved with a larger raise. We’re chatting with investors to see what vision they are aligned to. What are your thoughts?

Question: Why do you want to raise [$10m]?

What they mean

Whilst this is a common-sense question, an investor can also ask it if they think you are raising too much or too little. They may have got a sense you are not quite sure you know why you want that number. If you keep getting asked it, preempt it upfront.

As one founder blogged recentlyin San Francisco they said we were raising too little, and in Canada, they said we were raising too much!

This question is quite similar to “how are you going to spend it”, but more directly you need to explain the specific logic as to how much you are raising. They want to know your thinking!

This question could be rephrased as “why do you want to raise $10 million? Why not five, why not 15?” You, therefore, need to ground this question into your specific plan from the financial model, the competitive dynamics of your industry and your traction to date.

If you are more experienced and have a track record, you have more credibility to ask for larger amounts of money.

You never want to have just one reason for the fundraise number; it should be multivariate. What is the context of your industry? Who are the competitors, have they raised a lot of money? Have you really figured out a scalable acquisition channel, so the time is now to go boom boom? Has something happened in the industry which creates a compelling opportunity to capitalise on it? Investors do not care that you are broke and need to make payroll. They want to hear you want to make bankroll bitches!

What you need to say

“We believe that the big data market is at a point of inflexion. We don’t believe that first mover advantage is the best strategy since it involves a lot of market education, what makes more sense is to be a fast follower.

Our key competitors are Google and Facebook who have both raised $25 million, whilst they have raised more than us, our product is very similar, but improving faster due to our extensible architecture, which has allowed us to secure more landmark customers since it is easier to integrate. They have spent a lot of their funds educating the market through marketing spend. We believe this is the perfect opportunity for us to raise a more meaningful round to firmly position ourselves as the leader in this industry.

According to our financial model, we need between nine and $14 million to hit our key objectives. We are going to the market to raise $10 million since this is the minimum amount we need, and we can see if investors love our plan and want to commit more. This gives us a runway around 20 months unless we are more aggressive. I would be happy to take you through the key assumptions in the model.”

Aka…

Deal questions for startup fundraising investment

Question: What are your milestones for the next round?

What they mean

Unless this is your final round of investment before you go to IPO, there is always another investment round. The next round of investors will want to see that you achieve key milestones which adhere to their heuristics and market benchmarks. Of course, you are building a business to make customers happy but you’re also building a business which is attractive to investors. The danger is you act like Beepi and focus too much on investors.

The earlier the stage of your startup the more your focus on milestones will be thesis based, essentially in/validating something. This may be illustrating that you can ship your MVP, basic product-market fit, come up with basic metrics such as your acquisition costs through certain channels etc.

Later stages such as series A and series B are much more about the numbers. Your milestones, therefore, become much more financial, such as the growth rate your revenue, the number of customers, demonstrating cohort based retention etc. The milestones, therefore, are a function of both qualitative and quantitative integers rather than strings (storytelling) the larger you are. Do not have too many, you need to be focused. Being unfocused is never a good thing unless you are a competitor.

What you need to say

Our milestones are a combination of qualitative and quantitative figures. Let me first start with the qualitative ones. Internally our KPIs are the following: ACSOI (cough, Groupon), MRR, MRR Churn and MRR growth. These are the things that we track daily, weekly, monthly, as well as through cohorts.

Through discussions with investors, we understand for series B they want to see us with a MRR of $1 million and a growth rate of approximately 40% month-on-month. Naturally, it’s easier to get the MRR numbers if we have a low churn; we target under 2% monthly. Our qualitative milestones in 12 months time following the closing of the round are therefore $1.2 million MRR and an average three-month training growth rate of 30% month on month. Qualitatively, it’s critical for us to be competitive that we are able to close deals with Yahoo, Microsoft, and Facebook.

For us to be a compelling investment proposition at series B we need these deals done. Part of our funding is to hire three people in our business development team who we already have lined up, waiting to join to get us there. Do you agree that these make sense?

Question: Why are you raising now?

What they mean

Investors love it when you don’t need to raise it all. They want to give you money when you don’t want it, of course, you want the money when you need it. It’s high school all over again. If all the girls want to date you, guess who is popular.

In asking this question they’re firstly dealing with the crocodile brain- the first emotion is fear. They are trying to figure out if there are any skeletons in the closet or not? Are you about to run out of money? Do they need to run far, far away!

Once they get over fear there is the greed question. Perhaps you are about to reach the point of inflexion and you’re raising money for you to be able to capitalise on that? This is a compelling reason for investors to invest. Bonus points if you undervalue yourself!

You may also want to add that the timing is perfect in the market for you to raise. The timing question is incredibly important! Bill Gross at Idealab and found the key factor in why some companies were big hits and others failed was… timing! The timing is always now or to position you to be at the right place at the right time in a year or two. As Wayne Gretzky said you want to skate to where the puck will be, not where it is.

However you answer it, you are raising now because of a great opportunity and the timing is perfect, never that you need money!

What you need to say

“Artificial intelligence has finally come out of a cold winter. It’s currently the top of the agenda of the executives at every single company. Through the relentless commentary of the media and even the White House putting out a position paper, the market is finally educated. We think this is the perfect time to aggressively penetrate the market.

We have spent the past two years developing our product to be one of the real leaders in the industry, and frankly, it’s beautiful, but that’s just my opinion! We want to share our amazing product with customers and that costs money.

We have been funding the company out of our own resources and due to the sales cycle, for us to more aggressively and land grab customers we need to spend money on marketing. To put this into perspective, customer feedback has been incredible and we get most of our customers through word of mouth recommendations. They have all run out of options to radically decrease their cost base. Automation is the only answer. Our hard work is going to pay off. 

We know that you had a fantastic experience working with Google Brain previously before joining A16Z and so we want to come and talk to you first, to see if you would partner with us on this journey!

Question: What is your runway?

What they mean

The investor is asking are you about to run out of money! They are trying to figure out who has the negotiating leverage. Unless you have a lot of alternatives, meaning competitive pressure for the deal (a hot deal) the investor could even be sneaky, let you run out of runway and then offer you money on worse terms because you have no alternative. This actually happens.

They’re also trying to understand how fast you need to move on this deal. If you have a lot of runway, then you as the founder have a lot more negotiating leverage. As we said before, investors want to give you money when you don’t need it. Slack raised a lot of money when they didn’t need it, so they wouldn’t have to raise when they did. They got good terms, so why not?

If you have 12 months of runway and you’re talking to investors about raising more, this is quite compelling. Perhaps you want to raise the money because traction is going so well that it makes sense to triple down on what you’re doing.

This is not the time to have a heart to heart, girlfriend chat about your stress. You are never stressed for cash, more would just be nice…

What you need to say

We closed our round four months ago. I know you were a founder before, so you get how much fun fundraising is! We still have 14 months of runway on our current burn rate. The market is adopting our product far faster than we had anticipated.

We have identified scalable marketing channels and our onboarding is automating flawlessly. We’re talking to the market since if we can get strong terms, it makes sense for us to triple down on what we are doing.

We have no need to close a round, but if the right partner sees the opportunity as we do, we think this is a perfect time to more aggressively penetrate the market.

We don’t want to get into bed with people we don’t like. We can’t divorce our investors! Fit matters. We are sound you out 😉

Question: What will your runway be for this round?

What they mean

This is a funny question to founders who don’t quite understand the implications.

If you have a strong business fundamentally, and you tell investors you’re raising money for 24 months, then they are going to think and then probably say that you are not spending money fast enough and being aggressive in pursuing growth.

If you say that you’re raising money for 12 months, they will either think you are ignorant, since it takes a long time to raise money, and you will be back out fundraising in a matter of months, or that you are growing so fast that you just need to validate a few things before you raise a considerably larger round and therefore this could be viewed as a bridge round.

Typically, the best answer on average is 18 months. This gives you 12 months to have your head down and execute and six months to fundraise.

They will also divide the amount you are raising by the months to figure out what you burn rate is. They will then compare that against their heuristics and portfolio companies to see if that feels high. If your burn rate to headcount ratio is low they will be impressed.

As usual, answer this with a thought process, not a specific number and stare. Investors want to see you are considered.

What you need to say

Our base plan is 18 months. That obviously gives us 12 months to execute and six months to raise. We still need to validate our scalability through the affiliate channel.

If we are able to generate converting leads at $15, then our CAC works very well with our assumed LTV, and we should more aggressively scale this marketing channel.

Talking with the head of marketing, we might drive an additional $500K through this channel, which would reduce our runway by three months. The theory being that we could go to market and raise a larger round given our high-growth rates.

Do you agree?

Question: When do you want to raise next?

What they mean

When do you want to raise next?

Why?

There is a presumption here that you will raise again. Once you start down the VC path, that is the norm. VCs are expecting huge things in a short time period, so you need to be on the right trajectory. It’s unlikely you are going to throw out enough cash to grow fast enough (or be profitable) without more cash.

So once you start getting funded, you need to have a funding plan for what and when you will inject yourself with more.

How much do you want to raise? Do you have a funding plan?

Trust me, hardly any founders have ever thought about this.

This is very similar to the question of how long is your runway. It also implies that you are going to raise next, and the next question that will come is how much do you plan on raising then?

Understand that investors get diluted at each funding event too. They will be sensitive to how much their ownership is and what future commitments they need to make to achieve their desired ownership stake (It doesn’t matter if you exit for a bill yo if they don’t own much of you).

This is an opportunity for you to talk about how you think about the growth trajectory of your business and your fundraising strategy.

How you answer this question will depend on the exact circumstances of the company and why you’re raising at the moment.

Clearly, you should be linking the next fundraise to the current one. You are raising to achieve defined milestones within a distinct time period. So what is your runway, what will your burn rate be and how will it change?

Why will you be in a position to raise a great round with favourable terms (that will not dilute the investors terribly!)? What will the startup look like then? Why will you be so attractive at that time?

How you look today and how you look in the future will be different. How different depends on your burn rate. High burn means less runway. Less time means less time to turn from less of an ugly duckling into a swan. More time means your metrics will, or will not meet the bar for the next round.

Is the amount you are raising really going to get you to the new milestones you are talking about? Do they make sense at all? If you want to ship x features, can you really do that with 5 people? If you want 100k new customers, does that equate with your acquisition costs and viral factor you might have? Sure your numbers will not be right, but they need to be plausible. The story you are telling needs to make sense. If you don’t know about storytelling, then take the pitch deck thinking course. It’s totally free and will save you a tonne of time!

Investors want to you be a success story and not a problem child, sidewards deal. If someone else is doing the next round there needs to be a reason. The investor is not asking for a date to check their calendar availability. They are looking to understand what the future looks like and how you are going to navigate each stage. As a VC funded company, you are back in Uni having to pass exams to reach the next stage. So, understand the test you are taking. Know the targets you need to hit and make sure they correlate the amount you are raising.

What you need to say

“As you know we are raising a bridge round of $1.6 million. We achieved a lot since our series-A but due to the issues with replacing our CTO, our product fell behind schedule.

We were fortunate to find Jim, who left from Expedia to join us and has us firmly on track again. Our metrics are not quite in alignment with what series B investors are looking for, but the great thing is we only need four months for us get there, at the current trajectory.

Assuming we can close this round by the end of the month, I will start talks with future investors in two month’s time. Assuming that’ll take us five months to close the round, and at our current run rate, this $1.6 million will last seven months. Our CFO, Mary, has plans already to extend our runway three months assuming that conversations don’t go as quickly as planned.

We are clear on what our key milestones are, in terms of product, financials and key hiring. Happy to explain them in detail. Well frankly, we would like support from investors in hiring key roles, so it would be a great conversation to have.”

Question: How much more money do you plan on raising?

What they mean

This is not a common question in my opinion. I throw these in to make sure you are thinking about the right things and understand how investors are thinking.

At a simple level, they sort of wonder if you actually have a funding plan. If you raise a lot of money then you need to back it up with a big vision and plan. Is that what you are down for? Yes, ok cool.

To be clear raising money is bullshit. It is not a TechCrunch honor badge. Don’t raise if you don’t need to. If you want me to explain why ask.

The investor is considering how much dilution they are going to have before exit, but they’re also thinking how to allocate dry powder if they want to participate in future rounds. Investors have targeted ownership percentages in the company that they investing in.

If you are ‘capital inefficient’ and need to raise a tonne to build a big company, this might not work for them.

Since most startups fail, they have to have a large enough position in the successful companies to make their business model work. If you have raised $10 million dollars to date and you plan on raising $70 million in total, that is an additional $60 million across maybe 3 rounds. They will have to do the math to figure out how much they will need to commit to maintain their targeted position.

This question also is a test to see whether the founders have considered their execution strategy and the type of business and scale that they want to build. If you say that you want to raise $5 million more and you have only just done a seed round then they might wonder if they have found the least capital-intensive business in the world or the most naive founders.

They are not saying raising is cool. Investors care about themselves. They need you to win to make money. And they need to own lots of you to make a return.

Depending on your model, maybe they are wondering how capital efficient your business model is.

What you need to say

“We are an enterprise SaaS startup. Historically it takes seven years and $70 million to get to IPO. We are quite similar to Box in some regards given our customer focus and product complexity. According to CrunchBase, they’ve raised $85 million, so that is probably a good benchmark for us. Assuming we follow their trajectory, it probably makes sense. Times have changed a bit since they started, so we expect to be able to grow faster due to the number of smart phones available. A lot needs to happen in the future so we are focused on today and the next year, but we have an eye on the future. 

Deal questions for startup fundraising investment

Question: How much do you want to raise at your next round?

What they mean

Let’s face it. If you get to the point that investors are asking questions like this, they are more out of genuine interest than of being out of a sneaky nature. You won’t get asked this if the investor isn’t making the cog wheels in their head tick over. It’s a consideration, not a selling point. But don’t wimp out. It’s yours to lose now.

You can, of course, turn it around and reply ‘How much do you think we should be raising?‘ I think it is fair game to put investors on the back foot if that is your personality. Only do that if you sense a little weakness!

Your answer informs them as to the scale business you want to build and whether they are able to participate in the next round. It is also insightful as to how aggressive you are.

Investors are asking questions to reconcile a question that pertains to themselves, not always out of your beneficial interest. So when you get asked a question, pause. Why are they asking a question? What do they want and need to hear? Do not think about yourself.

There are three ways you could play this:

  1. Monster play: We are shooting for the moon. We have our shit together and want to grow fast as we know how to spend it (You probably don’t if you haven’t done it before). This appeals to a lot of people who are running the go big or go home playbook.
  2. Profitable play: We don’t need to raise big money. We believe we can build a nice profitable business and grow with cash. This will suit some investors, but not all.
  3. Middle of the road: You will raise reasonable money if there are fair terms, but otherwise you want to build a reasonable business, which might not be a rocket ship. This may not appeal to anyone, but it may be the reality for most.

What you need to say

We like to take things one day at a time. Clearly, this series-a is a large milestone for us and we have a lot of work to get down to for us to scale up as planned. We have set out our milestones for the next round and our target is to be at $12 million ARR.

Assuming we hit that, it should be quite reasonable for us to raise $30 million, assuming that the investment environment does not change. This is similar to the raises we have seen our competitors raise at this stage of business.

Question: Who is your ideal investor?

What they mean

They are actually asking why you’re pitching them specifically, and if your description does not match the person you’re currently talking to, then why are you in the meeting room! You want to craft this answer to be different depending on to whom you’re talking to. Investors like to feel special.

Deep down they know they are checkbook, but they want to feel that their existence means something more, AKA they can provide value-add. Founders need to appeal to their egos to get their wallet.

This is best done by doing some research into the person’s background so you know how to sell to them.

To be clear though, you are not raising from a firm, you are raising from a Partner at a firm. The Partner you have is your dude. That’s who you report to and need to keep happy.

  • They can fire you
  • They can not do their pro-rata
  • They can talk shit to other investors
  • They can bore the pants off you (not in a good way) in board meeting (BORED meetings!)

Pick your Partner carefully.

So the best answer is you sought out the firm for THAT partner. You want him.

Ok, but why would you want a particular investor?

  • The partner gets your industry and was an operator before
  • They recently raised a fund and so have dry powder (They are not 5 years into the fund and are out of investment period)
  • They ‘get’ and invest in your industry
  • They have not invested in direct competitors
  • You have positive feedback from other portfolio company founders
  • You heard they make quick decisions and have reasonable terms
  • They are a brand name you can use to establish credibility
  • They have incredible founder support (A16z, Frist Round Capital etc)

What you need to say

We want to develop a relationship with an investor who can stay with us through the next three rounds. The reality is that taking investment from VCs is more like a marriage, so the size of fund of investor is important, as is the quality of the partner. We also want to have people on our board who are going to be able to be fantastic sparring partners to challenge us. 

There really are not many investors around who get enterprise SaaS. So, you are a founder and bootstrapped an incredible enterprise SaaS startup yourself. You get the struggle. I want you to be on my side.

Khaki Capital just closed a $700m fund so we are perfect for the stage of your new fund life. We checked and you have no directly competing portcos, but you really are covering the space.

Question: Are you raising at the moment?

What they mean

At a basic level, the investor is asking if you are wasting their time or not. If you say that you aren’t raising right now, then they are wondering why they are in the meeting. You as the founder, therefore, need to let them know if you’re not raising right now, that you will be and are looking to build relationships with investors to figure out whom you want to deal with in future.

Alternatively, perhaps you requested an information meeting with the investor and therefore they’re asking this question to see if they pre-emptively can get in on the deal without a lot of competition. You need to think carefully about why you are talking to investors and give an appropriate answer as to whether or not you are raising. Of course, the next question will be how long have you been raising for…

Get this in your head though! You are either raising or you are not. There is no in between. Fundraising is a big commitment and you won’t get it done if you are dabbling. If you aren’t really raising say ‘I am not raising, we will be in a few months and would love to be in touch.’

What you need to say

Are you raising or not? It’s a simple question unless you have particular reasons why you want to give a misleading answer.
Yes. A lot of things are going right and since we got that article published in TechCrunch; a lot of analysts have been spamming us.

We spoke to a couple of investors who did inbound and so there was demand to invest in us, so we are going full on in the process, starting this week. Well with you actually! We know some other investors quite well, so it would make sense for us to spend some time together and see if we are a fit. I read you invested in bla company the other week. That’s a great deal. We’d be your next.

Question: Who else are you talking to?pitch deck

What they mean

Depending on how you answer this question, it can imply that you have been trying to fundraise for some time, are not discriminate in whom you are trying to raise money from, or provide insight into who the potential competition is. The best thing for you to do is to provide as little information specifically as possible, whilst still intimating that there is FOMO to be had.

More often than not this is an expression of interest. The investor is wondering if you are into the process and they need to move fast. All VCs are sheep so they will be more interested if they think other investors know something they don’t and so you are hot property. They are especially interested if big name VCs are chasing you.

Never mention the specific investors that you’re talking to. Investors know other investors far better than you do. They can easily call them up and check everything that you said as well as even potentially collude. There just isn’t any upside for you as the founder to name names. The best thing to do is say we are talking to firms of a calibre similar to yours, as well as the principal sides of telco companies etc if say you are servicing telcos and they could be corporate investors.

What you need to say

We have only been fundraising for one week, however, we have already got quite a lot of interest from three of the big VCs who do SaaS and have first metings with them. You can probably guess who they are.

Since we are profitable, we are under no pressure to raise right now so we can afford to be picky. Our ideal investor has a large fund size and experience and focus in SaaS, so those are the people who we are talking to. I love your background, so I’m sure you would be a valuable lead.

Question: When are you looking to close?

What they mean

If you have already started raising and investors know this they will very much want to know where in the process you are.

The real reason investors are asking this question is to understand how fast they need to move. Are they late or early in the fundraising process? If you’re looking to close in three weeks, as you have been raising for two months, and only just got the introduction to Khaki Capital, then they may be concerned that they may not be able to move fast enough to close the deal.

Alternatively, maybe you just started raising and are therefore under no time pressure, in which case you can just say “we just started raising so maybe four months?”.

There may also be a scenario where you’re running out of money so closing this is a necessity. It’s best not to show desperation here, as you lose negotiating leverage. Under no circumstances look desperate.

You need to be reasonable about deadlines. You don’t get an equity round done with money wired into your bank account in a week. That just doesn’t happen. It’s maybe possible with a convertible note. If you are just starting raising then there isn’t a need to pick a date- it will take as long as it takes. Just make sure you started raising early enough to have enough runway to not be desperate.

What you need to say

“We are in the middle of our fundraising process so you are a little bit behind. Fortunately, we have taken the time to create a proper data room (Note: use this check list!), have a model done and various material that other investors have asked us. This should help you get up to speed quite rapidly. How long does it take you to typically get a deal done? We would, of course, love to work with you, so would like to have you in the process. If you are serious I can manage others’ progression.

Question: Why do you want to raise from us, specifically?

What they mean

Investors want to feel special and that there is a reason why you want to raise from them and no other people. It’s quite like dating that way. “You have legs is a bad response” as is “because I hear you write checks easily!”

The best answer is of course not about the money; it’s the quality of the partners, the brand reputation of the firm, the fact they do follow-on investments and all the value add that they offer. You need to be specific for each firm that asks this needy question, but you can tell them the same sweet nothings 😉

What you need to say

Khaki Capital is the leader in SaaS. You guys have done some fantastic deals from Slack to Box and Asana. The best founders choose you. You yourself, David, write the most fantastic blog and we have been following it for the past few years.

Our metrics dashboard is based on your template.

Of course, we want to raise from Khaki Capital, but the reality is we take money from a specific partner and you are the partner that we want the most!

Deal questions for startup fundraising investment

Question: What value, besides capital, would you hope to see our firm provide your startup?

What they mean

This is a different variation of the question we just went through. The investor is basically wondering whether or not the founder has considered fit or are they pitching blindly to anyone with a chequebook?

Of course, they’re fishing for a compliment too (needy bastards).

If you do groundwork, researching every investor before you reach out to them and before you have a meeting, this will be easy. If you haven’t done your homework you are going to have to think fast on your feet.

The main value-add you can get from a firm and a partner are:

  • Partner is a sparring partner to challenge you
  • Network access for business development purposes
  • Network access for recruiting new staff and help close top talent
  • They have teams on staff to support startups. a16z focuses on super tech companies so offer marketing and bus dev etc to compensate for the suckiness in everything non-tech
  • The credibility the brand name of the investor offers when you are talking to people, be it staff, partners and the like
  • If you are really rich then you would want an investor on board to keep you focused and honest so the money you put in really makes sense (Yes, this is a thing)
  • Finally, the investor may be able to provide support in getting you an exit

What you need to say

Trade capital as a commodity. It’s pick up 101.
Look David, we think we have a compelling value proposition in our startup, so capital is a commodity to us.

There’re lots of investors who are expressing strong interest to proceed. We are in a fortunate position to have a choice. We know that at the end the day, it is us the team that is going to execute and makes things happen, but a great investor can help make more good things happen when they have something fantastic to sell.

Having been in the industry for so long, you have the most amazing Rolodex. You have also seen many companies succeed and fail and have a perspective that we don’t. We like your opinionated views on things.

With you on our board, we think great things can happen.

Question: There may be a conflict with one of our portfolio companies, are you happy to talk to us?

What they mean

Did you not actually check who the portfolio companies are the investors and that your direct competitor is a portfolio company?

Before you reach out to any invsetor you need to check:

  • Their website for who they list as their portfolio (They don’t always update it fast)
  • Crunchbase to see who is listed as investees (May be more up to daye)
  • Google search for funding announcements (If you have the time, but I presume you have been tracking)

To be honest most investors will not take a meeting with startups if they know that they have invested in a competing company. Where there is a grey area, they will normally say upfront “look we invested in Facebook and there may be some conflict in your advertising plans. Are you still happy to chat with us or shall we end things now?

In some sense, the investors are covering their ass/reputation.

Dodgy investors would not say this. They will brain rape you for information. So pick who you share information with. 

What you need to say

“Yes David, we know that you’re invested in Facebook and we have seen that they have been expanding in advertising. The great thing is we are approaching things very differently to how they are. In fact, Facebook is a potential exit opportunity for us, and given the relationship that you have with Mark, this could work out very well for all of us.

Of course, we would want to manage conflict of interest, but there are ways around everything.

Do you want to proceed?

Question: What are your deal expectations?

What they mean

This is an indirect way of asking what your valuation is and are you crazy or not? The entry price and the terms matter for investors to generate an ROI.

Information is power. If you say a lower number than the investor was expecting then, this is super news for them.

If you pull out a crazy number, then this could actually be a conversation killer, so you have to be careful.

If you give numbers, never give a specific number, instead give a range, and add that you’re feeling out what the appetite is in the market. If you have the data, it can also be good to refer to benchmarks so that you show that you know where the market stands.

It’s best to demure and say you have fair expectations and the market will set the price.

What you need to say

“These are in line with the market. Talking to some of my friends who have raised recently at series a, they have all secured a raise in a pretty normal range and at standard terms, meaning no 3X participating preferred liquidation preferences, haha.

Of course, terms matter for us, not just the valuation. We don’t want to have too high a valuation that we can’t grow into and cause problems at our next round.

Given our traction and benchmarks, we think a range between $9 and $12 million is market.

For our lead, we expect to give them standard information rights, a board seat, as well as a standard liquidation preference. It’s too early to start getting into other nitty-gritty.

Would these be in the ballpark of what you are expecting?”

Question: What is your valuation at the last round?

What they mean

This is a straight-up question that you can answer directly.

They aren’t just interested in knowing the number. They are doing VC math. Each valuation round should be at least 2x the one before. They will triangulate the traction you have since the last round and figure out if your valuation increase or potential valuation makes sense.

The only thing that you need to bear in mind is if they are obviously peculiar things happening. For example, if your 1st round was $1 million and you are raising at a pre of $20 million, then that is a 20X increase. Does your traction and change of circumstances justify such an increase? You will have to be prepared to answer this.

On the other hand, if you raised at $5 million Pre before and are raising at $6m now, then something has been going wrong, right? Your valuation should be higher if you are a high growth, sexy opportunity.

If you know your growth is not great then you might want to call your round a seed extension, second seed etc as opposed to a series-a. Seed is a phase these days.

If you are ticking along nicely, this is a simple answer.

What you need to say

$5m pre. We raised $2 million, so $7 million post. That was 12 months ago. We are raising $10 million now. In 12 months we have 4x our revenue and dramatically improved churn to get to negative net churn through a smart expansion revenue strategy.

Question: What are your valuation expectations?

What they mean

This is a very similar question to the previous one “what are your deal expectations?” but focused directly on your valuation. Are you expecting a crazy premium valuation, or you going to be in line with the market?

Fundamentally investors are wondering if your valuation is way out from what they can afford, or not. If you are talking to a seed stage investor and you are asking for a $20m pre, it’s quite likely that they won’t be able to afford to get to a targeted ownership percentage in your company. Throwing in a million just may not be worth the effort. At which point, it’s easier to just end the conversation now and save everyone some time.

Especially at the earlier stages, a million difference in your valuation can make a really big difference to their exit value.

Determining your valuation is difficult because there is no right answer. You have to be both realistic on the upside without scaring investors off, but on the other hand, you do not want to undervalue your company, leaving money on the table, as well as the VC thinking something is wrong.

I’ve written a blog here on how to approach the question of What’s your startup valuation when you are more directly asked.

The best way to handle this question, like others, is to do all you can to have several VCs interested in you ;). If they know there is demand in the market then the investors are the ones who are price takers. You can afford to be a little more arrogant in responding to this question if you know you have a lot of options. If on the other hand, you don’t have a lot of options, you need to be quite careful.

Typically you just want to say you have reasonable expectations and the market will set where that is.

What you need to say

This is not a private equity deal. You can’t do a DCF on a startup. All you can do is compare traction with other companies having raised in the market, to understand what the market rate is, and pricing happens from investor offers.

Who we raise from matters to us so we would prefer to have the right investor rather slightly better valuation, of course, both would be lovely! We think our valuation will be in-line with other deals that have been done in the previous two months, which I’m sure you’re aware of.

Question: What are the terms of the deal?

What they mean

The terms of a deal start with whether you are doing a convertible note or a priced round.

A convertible note is a debt instrument that typically converts into equity when you raise again- what is called a qualified financing round. The key terms are the discount and the cap and perhaps the interest rate, though the later is not that key and is typically the statutory minimum (Ask your lawyer).

A priced round is where you agree to a lot more terms and in great detail. The key terms are the pre and post money valuation, the amount you are raising (since pre + investment = post valuation) and various control and economic terms such as if there is a board seat, information rights, liquidation preference, anti-dilution etc.

The investor is trying to get information out of you as usual. Unless you are in advanced discussions and have received multiple term sheets, it’s probably best not to get into too many specifics, particularly if you don’t understand term sheets very well.

You have been asked this question specifically so you will have to respond with something. “I don’t know” is a bad response.

If you respond with something like “market” then you’re in inviting a follow-up question of “can you be more specific please.”

I would treat this with a high-level response whilst still being slightly vague, and deferring to the investor to offer their terms. It’s very normal to say in your pitch deck:

  • Seed stage
  • Priced round
  • Raising $10m

Or

  • Angel round
  • Convertible note structured as SAFE
  • Raising $1m

I don’t recommend saying more than that. You are naive if you think you will be able to set all the terms, so why bother. Get the investor to offer a term sheet and then negotiate what you can.

There is an old VC joke, “You can set the valuation if I can pick the terms

What you need to say

High level, we are doing a priced, seed round. We need $3m according to our plans. Terms of course matter to us, arguably more than the valuation. We appreciate that you as an investor will want to have certain terms to protect you as a minority shareholder, and we completely understand that.

We are not going to accept things which are not market such as full ratchets. We are expecting pretty standard terms. I would like to know how you are typically structuring your deals?

Question: Do you have a lead?

What they mean

When a VC says ‘lead’ what they mean is a ‘lead investor.’ This is needed more with a priced round, but you also need one to get people together in a convertible note. A lead investor is the person you negotiate the terms with, that does the most due diligence and will likely lead communication with you after a deal has been consummated. They act as social proof to encourage ‘followers’ to get in on the deal.

If you do a priced round, then the lead investor will likely have ‘main investor rights’ and sit on your board. You expect they will at least do their ‘pro-rata’ or lead the next stage too (if they serve that next stage).

Finding a lead is the most important thing that a founder has to do in getting a round done. There are fewer leads than one would think. Most investors are followers. This means they won’t do anything until you have found a lead. It’s best to always ask investors if they lead rounds, or not?

If the person you’re talking to is the follower, that means they can’t move on this until you have found a lead. If that investor is a lead, then they are wondering if they have competition. Lead investors (Mainly VCs) are unlikely to ask this question- they will presume you are talking to them as you want them to lead. Followers are the ones who ask this as they want a lead (then they will ask who it is and hope it is a big, brand name firm).

You will frequently find in angel rounds that first-time angels will say “I haven’t done a deal before, so I’d like an experienced investor lead the round and I’ll join.” Basically, they know that they don’t know what they are doing, so they don’t want to mess up. They hope to learn the ropes by learning from the experienced person you find.

Finding a lead can be a huge pain in the ass, so concentrate your effort finding one first (ideally).

What you need to say

“We know that finding a lead is the most important thing and is, therefore, our focus. We understand that you frequently lead rounds and this is why we are talking to you as one of our first meetings. From what you understand so far, would you be interested in being the lead?

Question: How much do you have committed so far?

What they mean

Investors are sheep. There are very few conviction investors that don’t care what other investors think (which is ironic since you really only get big returns by being contrarian, and good terms in something perceived as undervalued).

Commitments mean investors have said ‘I am in.’ You can have hard and soft commitments. Hard is basically money in the bank. Soft are conditional, such as conditional to you getting a lead investor, raising a certain amount etc.

The investor is literally asking how many investors like this deal and how much money they are putting behind their conviction. Having a lot of commitments is the ultimate social proof. Think about it, you have two companies that are the same, but one has raised $500k of the $750k and the other not a dime. You are going to think the one with ‘commitments’ is more attractive as other investors like it.

This question is more likely to be asked by Angel investors or small investors who are followers. Most investors don’t have a clue what they’re doing, so they use signals instead. If smarter and better-known investors are interested in the deal then maybe this is something they want to jump on.

People always assume others know something that they don’t (which is super dangerous!). If you have only been raising for two weeks and you have half your round filled, then it looks like this deal can happen and people should pay attention. Success breeds success.

If you haven’t any commitments so far, then it’s best to say you don’t have any when you have only been raising for a week, than for 3 months. If you have been raising too long, then investors think the deal has been ‘over shopped’ and there is something wrong with the deal. I.e. PASS!

What you need to say

“We are raising $2 million and we have $700,000 already soft committed. They are large checks from angel investors who are waiting for a lead. This is why we are talking to you.

We understand that you typically write checks for around $1 million so that should be in your sweet spot.

Question: How long have you been raising?

What they mean

How long have you been out pounding the streets looking for investors? How long have you been pitching investors?

Investors don’t actually care how long have been raising for, per se! This question is trying to figure out if you are a winner or loser.

Your fundraise has a shelf life like bread getting stale.

If you have been raising for four months and not getting a bite, then this is a loser. You clearly have been rejected a lot. There must be a reason the investor will be thinking.

If you have been raising for one day then, who cares? You only just started raising.

People talk so this is hard to lie about. You can take a little poetic licence, but +/- 15%.

Really good deals are fairly effortless. Those deals get done. But, if you hear about a deal getting done in say 3 weeks, you don’t know the backstory.

Here is a real example from Mathilde, CEO of Front:

A few weeks later, we had raised $66M, led by Sequoia and followed by DFJ.

“A few weeks.” Wow, cool. So that will be the same for me too you may be thinking no. Here’s the backstory:

I don’t have enough experience to draw general conclusions as to why it went well, but there is one thing I’m pretty sure has helped: I leveraged my existing relationships with one partner in each of the VC firms, to be able to get a partner meeting right away. Building these relationships happened over the course of Front’s entire existence, so in effect, it took me 4+ years to secure this funding 🙂 Build relationships early and maintain them regularly, but keep it short and focused (I usually meet with each firm once every 3 to 6 months).

She put in 4 years of relationship building in order to get the deal done rapidly. Raising sucks for everyone, but you can make it easier and ensure you don’t get viewed as a dead deal.

What you need to say

“We started our process two weeks ago. Our first meetings were just to get our footings and now we are talking to the big boys like you, ha ha. We haven’t raised before, so sure you know it’s a big learning curve.

Question: Have you thought about raising venture debt?

What they mean

Venture debt is a lesser known vehicle for raising funds. It’s basically debt but available for startups. It’s only available around series-a when you have been generating revenue that the venture debt funds will look at you though.

VD has a lower cost of capital than VC money. It ranks near the top of your capital structure, so if shit happens and you have something to sell, then this debt will be the first to be paid back. They will charge you a high investment rate at say 12-15% (depending) and then warrants of about the same amount. You should talk to multiple VD companies like you would go to banks applying for a mortgage.

The truth is the main criteria for VDs to invest is the quality of the investor who is leading your round. Venture debt investors do not want to lose money, so the theory is if you have a great investor they will not let you die (which is not entirely true).

If you are a seed stage company then this is a pretty stupid question. If you are at series B and you have not mentioned that you are raising venture debt then it’s a great learning opportunity. It could also imply that the investor is starting to think about how to put the round together and that’s a positive sign.

It is debt though. You need to pay it back. One of the big benefits is that you can increase your total raise by around 25% and take less dilution

What you need to say

I’m sorry I don’t know that much about venture debt. I can remember reading about someone getting some in Pando, but I didn’t really pay attention. I presume it is like debt but for start ups? We are open to anything that would optimize our capital structure. If you lead, it would be fab if we could discuss it and if you could perhaps make some intros to guys like SVB and Kreos?

Alternatively.

Yes, we are talking to three firms already. They’re waiting for a term sheet before they proceed to DD as usual. They have offered a soft term sheet for 20% of the round on top”

Question: Who are your investors?

What they mean

If you have reached Seed, Series-A etc then you have raised money before (well, for the most part!). Investors want to know who is on your ‘cap table.’

Assuming this investor does not know you very well, then this is a good way for them to qualify whether or not you are good company. If you got great investors in your previous round then you must be okay. It’s country club rules. Investors also like to invest with people that they know, like and respect.

So, if your investors are friends with this investor, then David gets to call up John and have a chinwag about internal information. Of course, John will probably lie a little and give a rosier picture to David… Investors want to make money right, and ensure you get funded (Investors know this) 😉

You should just be straight up, in short. There’s nothing really to hide here and you can’t really.

The important thing to understand is that once you name names, certain types of VCs will just email/call those investors and ask about you. You need to make sure you have briefed your investors before you start raising. Everyone needs to sing from the same hymn sheet. How dumb would it be if one of you angel investors said ‘oh, sure happy to talk? Didn’t know they were raising?

What you need to say

Index led our a-round. We also raised money from some great entrepreneurs in the valley through my contacts in Google. Index is, of course, interested in participating in the round, but we want to make sure we get market rates

Question: Are your existing investors investing in this round?

What they mean

Investors expect your investors to be investing again. If they don’t it’s a really bad sign.

Investors look for signals, both good and bad. Investors doing the pro rata is a neutral signal. Investors doing super pro rata is a positive signal. Investors doing no pro rata is a potential deal killer unless there are specific reasons.

It’s okay for angel investors not to do a pro rata because they don’t have any more money and this is a large around. If your lead investor is known to have money and they are not following on then this is really bad.

As a word of caution, if you raise from a top tier fund like Sequoia and they do not follow on or lead your A round, then you are pretty much screwed. Investors know you make your money on the big winners. Why would an investor not invest into a winner?

Investors always assume that investors have the inside track and if they are not investing, then something must be wrong and that you the founder are not telling them something.

Before you start raising, you have to discuss the fundraise with your investors and know whether or not they are going to invest. If they are not going to invest then you have to make sure that there is a good reason, and that you both tell the same story, otherwise your investor is fucking you. This is the worst possible thing to happen. A malicious investor can literally kill your deal.

What you need to say

Yes, all our angels will be doing their pro rata, other than some of the less rich angels that just don’t have enough powder. However, our lead investor from our Seed, Index, has too much capital tied up in the on-demand industry and their limited partners do not want them allocating any more capital to it. It sucks, but they are really supportive and are making intros for us. You can call Danny. He knows the signal this sends and so is going out of his way to help and let investors know this isn’t because they don’t believe in our business.

Deal questions for startup fundraising investment

Question: What are your investors pro-rata rights?

What they mean

If an investor invests and gets 20% of your company in a seed round, a pro-rata says they can invest the amount at the series-a that would enable them to retain that ownership percentage. So if your series-A would dilute them 25%, if they didn’t invest they would be down to 15%. If they take their pro-rata option (it’s a choice) then they get to invest so they add that 5% back. The math is a little iterative so ‘who gets what’ involves a little negotiation. They’re done for you in the pro cap table.

This can be a good or bad question to be asked. If your investors have pro-rata, then the next question is ‘are they doing their pro-rata?

It is a bad question if your investors have pro-rata rights and are not using them.

It is a good question if your company is doing very well and the investor is getting greedy and wants the whole round for themselves.

They are starting to think how can they block the investors from getting the pro rata… Yes, this happens (And quite often to a fund you have heard of).

dave mcclure pro rata block

What you need to say

“Yes, we have agreed to pretty standard terms. However, if you are looking to do the whole round yourself, I’m pretty sure some of our investors would be happy to take money off the table since we have grown quite considerably, and on paper, they have already multiplied their investment. I can, of course, introduce you to them to have those discussions.

Question: Why isn’t your existing lead leading this round?

What they mean

This is a situation you do not want to be in.

If you are being asked this and the investor knows who your investors are, they are asking as they presume the investors lead rounds at this stage, from what they are aware of. Something doesn’t seem right.

If you are a hot company and your investor has money, you can be certain they will be allocating as much dry powder that they have planned to the round.

Now investors don’t always lead rounds. They may be seed and series-a investors and simply don’t have the cash to do more growth stage companies.

You have to have a really simple answer to this question. Do not respond “um, I didn’t ask yet.” The default thinking of an investor is something is rotten in the state of startup. The first investors you should be talking to are your existing ones.

So, if you do not answer this properly, you may not be raising from this investor or any other. Make sure that whatever you tell the investor, that you agree with your previous one to say the same thing.

Not having any more capital, or not participating at this stage is typically the best answer in the absence of others.

Now, there may be an edge case where you don’t actually like your investor… In which case you need to be delicate. Do not talk shit. Say something like ‘ We are growing faster than we expected. We would love to have a lead that had in-depth experience in the SaaS space, like you do, to help us navigate the scaling challenges we will have. X is great, but they are generalists.

What you need to say

Quest are seed investors, they are happy to do pro rata, but it is not their investment strategy to do series-A. Pretty clean cut.

Question: Do you have convertible notes? What are the terms?

What they mean

Convertible notes are debt instruments that convert into equity. Someone gets diluted by these notes and it is not always clear whom. If you don’t know the three ways that this debt will convert, then you need to read this nerdy article: Key convertible note terms that no one understands and cost you big. We will go through the:

  • Pre-money method
  • Percentage ownership method
  • Dollars invested method

Investors are asking this to understand your capitalisation table and what the potential impacts are of any convertible instruments.

There is typically nothing sneaky about this question. If they are asking it, it means they are ticking off the mental boxes before maybe pulling the trigger on the deal. This is typically not a question to be asked in the first meeting. It can also be an off the cuff question you just gets asked out of interest.

Now, we need to deal with the ‘terms’ part.

It is not commonly known by founders, but once you agree to terms in deals, they become a watermark for future investors. If you were stupid enough, or desperate enough to have to accept a 2x liquidation preference, then future investors will want the same or more. They will use the terms against you.

When investors are asking what the terms are, they want to know:

  • If you accepted bad terms and so were either dumb, naive or desperate
  • If you have screwed yourself
  • If they can get the same terms

You don’t need to say each and every term, but you will need to say the main ones. You can also say ‘here are the key terms, 1, 2 and 3. The note agreement will be in the dataroom, for you to review once we have signed a term sheet.

What you need to say

Yes, our seed round was done as a $2 million convertible note converting at the next qualified financing round, which would be the series-A we are discussing now. The terms are pretty standard, but for headlines, there is a 20% discount and $6 million cap. We also negotiated to mitigate phantom preferences (Read this!)

Question: Do you have any government grants?

What they mean

Government grants are free money given to startups for some reason, typically to promote job creation and the like. I apply this question to basically anything free you get from the gov where you are incorporated.

This is a pretty bland question. In the UK, perhaps it could allude to the use of EIS, in Australia, it is about developer grants, and in Singapore, there are all sorts of benefits (Watch out if you did an NRF deal etc!). There is not that much that can go wrong unless there are obvious benefits in your country and you are too stupid to use them.

One edge case is that your grant is dependent on you operating in that country. Theoretically, you could lose those grants if you are raising in America and they want you to flip to a Delaware C-corp. You could have raised money from an investment department of a country (e.g. Singapore) and things could get tricky after you have taken money. EDB will subsidise hiring if you have certain types of technical people, it’s dependant on you being HQ there.

What you need to say

Yes, the Singapore government is very supportive. EDB see the potential in everything that we do and have granted us a fifty per cent benefit on salary on the hiring of up to twelve developers; that is a value of $500,000 over two years.

Question: Did you think about crowdfunding?

What they mean

Crowdfunding is when you raise money on a platform from generally unsophisticated people. It is done as an alternative to raising from VCs, but can be done together too.

This is only really relevant for hardware startups, and in some cases, consumer-focused startups since challenger banks in the UK have used them to good effect.

My friend is doing a consumer fintech startup told me she did a crowd raise alongside an angel raise as the ‘investors’ are also ‘customers’, so it’s a really effective means to acquire customers at a low CAC. Think of it as a marketing hack. Monzo did two crowd raises.

Doing a kickstarted is pretty 101 for a hardware startup. Haxcellerator’s accelerator prepares startups for a crowd raise not a demo day. I would really think about a kickstarter if you are just starting a HARDware startup. Just be aware they are not cheap. The average successful crowdraise blows $100k!

It can also be a stupid question on behalf of investors, or they think you haven’t validated your model and need to do so via the crowd. They could advise to do a crowdfunding round if you are really early stage, and then come back to them.

It’s typically always a bad idea to call investors stupid. Unless your name is Mark and you were goaded to go into the meeting in your dressing gown to tell them to screw themselves (True story!). Then adding they are stupid, poo-poo pants is pretty fine. I jest.

What you need to say

We don’t seek crowdfunding as being terribly applicable to us. We know some consumer businesses have got a great acquisition cost of customers from there, but we just don’t see any demographic crossover. We thought about it, but it is not something we would proceed with. Do you have views we might not have thought of?

Question: Have you thought about going to an accelerator?

What they mean

An accelerator is typically a 3 month programme where you enter a structured programme with the aim of kicking your ass to figure out product/market fit, grow, and then try raise at what is called a demo day. A demo day is where a load of investors are seated in a room, you pitch them all for three minutes and then they look to have a chat with you after. It’s for really early stage companies, though there are starting to be a few at series-a stage where they help you with growth.

At the accelerator, they expose you to lots of mentors who give you some advice. I mentor at a number of these programmes.

If you are asked this question, it’s not great. This may be a naïve question, or it could also be implying that you are not ready to fundraise. If it is the latter, you will find out quite soon that the investor is going to take a pass, but they are still interested in what you’re doing; you just don’t have the traction that they need to be comfortable yet.

If you are early stage, then the best answer is to say that the good accelerators reached out to you to join them, but you don’t see the value in joining a program. You are clear on what you need to execute on, and you need the money to do that. You could also be bad ass and say you mentor at the accelerators they were recommending.

What you need to say

I have friends who went through Y-Com and 500s, and they have very positive things to say about them. Firstly, we are out of cycle, they started in June, and our team is a little bit more seasoned than the typical founder who goes into these programs. Rather than support, we need the money to execute on the plans we have set out in detail.

Question: If you knew with 100% certainty that you weren’t going to be able to raise (more) funding, what would you do?

What they mean

Shit happens. What do you do if things don’t go to plan? Are you going to zero?

This is a curveball, but it’s a smart question.

It’s trying to figure out how well you know your business and how you respond under pressure. This is not something a first-time investor would ask you. It’s something a serious investor would ask.

In order for you to answer this well, you will have to have to have understood the upside and downside scenarios in addition to the base one you are proposing.

It is also a test to see if you are cockroach that just won’t die, and will stick with the business until it is successful! Yes, being called a cockroach is apparently a good thing these days. The best founders are creative, and creativity comes out of constraints.

If more money is no longer available, which in 2016, it often wasn’t, then are you the one on the mat knocked out, or the one holding the arm of the referee?

Implicit to this question is that you have the potential to flick a switch and get profitable. Whilst that’s not necessarily a great outcome for a VC, it gives you options as you have time to figure things out. If you are not profitable, you are default dead.

You want to have the option to be default alive. There will likely be impacts to your growth, but profitability and growth become a trade-off at a certain point when you are covering your fixed costs.

What you need to say

That’s a really interesting question, Fred! Would you mind giving me a moment to think? Okay, at present our payback on customers is relatively short, we are raising to invest more substantially in marketing and the infrastructure of the organization to be able to support that.

The core value proposition of our product appeals to one segment in a Venn diagram, and the new money is also to fill that out to increase our addressable market.

The first thing we would do is bring down our marketing expense and make the necessary cuts to headcount in the S&M department. Since we would not be scaling, we could also afford to cut some of our COGS account, meaning savings in our hosting, customer service etc. Because of that, our G&A would partially go down too. We have scaled up our developer team on the assumption of building out to enterprise customers; I would refocus the company strategically at the mid portion of the SME market and seek to build out our dominance there. This would not help us achieve our vision, but we would become a fairly profitable business. We could probably flip it for around $75m.

Question: If you knew with 100% certainty that you were to raise significantly more funding, what would you do?

What they mean

Things can go unexpectantly well. How are you going to manage high growth?

This is the flip of the question we just went through of what you would do if you couldn’t raise again. This is a meta level question that challenges you to understand all the drivers of your business. If you don’t know what you are doing, you are really going to struggle.

They are testing to see how you would build a substantial size business a lot faster than you had originally presented to investors. Investors want super high growth companies, so if you are crushing it, then you really might find yourself receiving a $20m check at a stage, and you are going to have to be able to smartly spend it.

If you don’t know how you will be able to scale hiring, allocate larger amounts of cash to the marketing channels you are utilising, scale your tech infrastructure and develop your product road map, you simple will not be able to cope.

A smart team will have thought about the downside, the base, as well as the upside scenarios. This could be a great moment to show you are worthy of getting a large check.

Maybe the investor is thinking ‘there is a lot of promise here, they have figured out their unit economics, what if they raised 3x more and went for it?

What you need to say

Thanks for asking that; we were hoping you would. We have already mapped out a plan! We see a lot of opportunity in the enterprise sector. They fundamentally are underserved. The issue with the enterprise sector is that there are a long sales cycles. Companies typically cannot afford the cycle of 8-12 months, the professional services and infrastructure we would need to deploy. However, if we had 3x more much money he would be able to address this.

We feel that if we raised twice the amount of money, we would be able to make a decent effort into really penetrating this segment which we think will be incredibly profitable. If we had three times the amount of money, I believe we will be able to afford a really strong VP of sales and make this scalable. Furthermore, we can double down on the acquisition channels identified for the SME portion of our customers that we are targeting. We have an LTV of about 3.5x and a payback period of eight months. According to industry benchmarks, those are quite strong metrics. We haven’t been able to afford to differentiate with really strong customer care and customer success, so we would dramatically improve our systems and make additional hires which would have a positive impact on our churn and expansion revenue.

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