HQQA034 How to get venture capital funding if you knew you wouldn’t raise more funding?

What they mean by how to get venture capital funding?

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.”