As a founder, you’ve probably wondered about the questions investors ask startups and other founders like you. It’s not only important you know what investors will ask you, but why they’re asking these questions.
To grow their companies, founders need funding. Meanwhile, investors are on the lookout for the next ‘big thing.’ This may seem simplistic and logic. But the truth is: it’s a process with many moving factors and variables.
Startup-wise, there are many startups in every sector—with more emerging every day. Few of those startups are market and investment-ready. At the same time, there are few investors and many of those investors tend to invest in specific industries they’re familiar with.
In a recent article, we focused on the top questions every founder asks before beginning their journey to getting funding.
In this article, we’re going to focus on the other side of the puzzle. That is, the investors and the kinds of questions they’re likely to ask startup founders looking for funding.
Startup funding rounds: A two-way street
The process of raising startup funding is a two-way conversation. Founders want the best for their company; they want to grow their business and need a cash injection to do so.
Meanwhile, investors are looking for opportunities where they can invest their money and generate a high return on their investment or a profit.
But to get to this middle ground, there are many processes, talks, interviews, and paperwork to be done.
The questions investors and venture capital funds (VCs) ask may differ based on the type of investor and the stage the startup is in.
However, in all cases of funding, you must share financial information and forecasts with the potential investor or investors.
Further reading: 9 Reasons Your Business Needs a Cash Flow Plan
As a startup founder, you should know that investors tend to invest in their niches or where they specialize best.
For example, you’ll find some investors and firms focused on fintech or software-as-a-service (SaaS) businesses. You’ll come across a few who specialize in SaaS in HR, hiring, or employment-related disciplines.
You’ll find others who prefer to invest in B2B e-commerce SaaS businesses, while others prefer B2C e-commerce companies.
You should be familiar with the specialty of the investment fund you’re targeting because you may get rejected simply because your business is in a different field than the one the VC invests in.
Investor questions about your startup management team
One of the most important elements that factor in an investor’s decision to invest in a startup is the founding or management team and their skills.
Often, the management team’s skills and abilities may exceed the unique value proposition (UVP) for the startup itself.
The reason the management team matters so much is because investors want to know whether your team can:
- drive the business forward
- truly deliver on the promises and forecasts in your pitch deck
- sustain the business during tough times
- work in accordance with your business plan
- pivot with the idea if market conditions change or become challenging
Here are a few management-team-related questions investors ask startup founders:
- Who are the founding team members? What are their skill sets? How do their skills support the business?
- How and why is the startup’s management team able to drive the business forward?
- How many employees does your company currently have?
- What are the top areas or roles you’ll need to add to your team in the short-term
Your track record, including having launched a previous startup, your success, and other work-related factors affect investors’ decision to fund your startup.
This has been the case with more than one regional startup. In those cases, investors saw potential and a strong track record as the founders had worked in companies like Uber. Armed with that knowledge, the investors contributed to their funding round.
Investors also want to know if your team is easy to work with. They also want to know if the overall founder-investor relationship will be a smooth one.
Startup investor questions: Market-related questions
Investors will also ask about the market your business will operate in and the estimated value. They want to know if it’s a large or small market; if it’s saturated or if there is demand for this product or service.
Market-related questions from investors will also cover your competitors, market traction, and potential risks.
If your business is relatively small, you may position it as a platform-type-of-business, advises Richard Harroch, managing director and global head of M&A at VantagePoint Capital Partners, in a Forbes article.
Globally and for most investors, a “big” market opportunity is in excess of $1 billion in sales annually,” he adds.
Here are a few market-related questions they’ll ask you:
- How big is the market opportunity?
- What is the total addressable market (TAM) for your business idea?
- What trends do you see in your market?
- How many competitors do you have in your target market?
- Which of your competitors is doing a great job and why? What is your competitor’s value proposition?
Investors want to know about risks in your target market and how you plan to handle those risks. Doing so allows those investors to see your thought process and how you plan to manage those risks.
Every business and every business plan involves risks. That’s the truth of business. However, with business, it’s not just financial risks that you need to be aware of.
Here are a few risk-related questions:
- What are the top risks you see in the market?
- What are potential legal risks?
- Are there any technology risks related to your business?
- Are there regulatory risks we should know about?
- What are potential product liability risks?
- How do you plan to mitigate those technical/financial/legal/product liability risks?
Startup investor questions: Product-related questions
In addition to asking about the market, investors will naturally be curious about your product or service. They’ll ask you a ton of questions about it. Here are a few of those questions:
- Who is your ideal customer?
- What is your ideal customer’s top pain points?
- How does your product or service solve your customer’s pains?
What do investors want to know: Metrics, finances, and forecasts
It goes without saying, knowing the important metrics for your company and how the business is performing financially is of the utmost importance.
This includes presenting financial forecasts of how your business is expected to perform over the next 1 to 3 years.
If you want to raise funding for Series A, B, C, or beyond, you’ll need to show growth and financial projects for 3 to 5 years.
Investors want to be sure you know the math behind your business. VCs, in particular, care about your metrics and about you knowing what the important metrics to measure are and how to measure them correctly.
“Know exactly what you want to spend your money on. Don’t tell me how long it will last; tell me what you want to prove. The most impressive entrepreneurs communicate the value of their businesses through numbers.” Patricof & Co. founder of Mark Patricof to Forbes.
In other words, showing investors that you’re ‘metrics-driven’ can make investors feel more comfortable investing in your startup.
Further reading: 5 Common Cash Flow Planning Mistakes Businesses Make
As a co-founder, CEO, or CMO, it’s imperative you know what your top key performance indicators (KPIs) are. Your KPIs should include growth metrics, reflect your company’s business priorities, and how you work with your team to improve those metrics.
Here are a few forecasting-related questions investors will likely ask you:
- How do you plan to grow your business in the coming 1 to 3 3 or 5 years?
Questions investors ask startups: Funding-related questions
Next up are funding-related questions. Investors want to know how much you want to raise—and yes you should know that — and how you’ll use the money they invest in your startup.
So here are the top questions investors ask startup founders about money and funding:
- How much do you want to raise?
- Why do you want to raise funding?
- What will you do with the money raised?/How will you use the money you raise?
- What is your startup’s burn rate? Will this burn rate increase after the funding?
Investors ask these questions to see if your plans are reasonable and whether or not you’ll burn through the cash they provide you with. And there have been many startup failures who had burnt through investor money and shut their doors soon after. (Hint: FAST rings a bell. The company raised $102 million in funding only to close its doors less than a year later!)
Funding-related questions also help investors see whether your financial and cost forecasts (ex: hiring, marketing costs…etc) are reasonable compared to their experiences with similar businesses.
Investors don’t want to invest in your startup today and see it flop or fail to raise future funding.
Questions investors ask startups: Marketing-related questions
Investors are curious about every part of your business. This includes your marketing plans and how you plan to grow the business over the next few years.
Whether or not this appears in your pitch deck, investors, especially VC investors, will ask about your marketing strategy.
Here are a few marketing-related questions investors may ask you:
- What is your marketing strategy?
- What does your marketing strategy include?
- Do you have a PR strategy? Tell us about it./What is your PR strategy?
Startup investor questions: What else do you expect from your investor?
While investors mainly pour money into your startup, coming to them for just money isn’t the best idea. Many investors, especially VCs and experienced angel investors, can offer mentorship and expertise in their niches. That’s in addition to their network of other investors.
Investors may ask you what else you expect from them besides their money. Be sure to have an answer and to mean it.
The investor-founder relationship is one that sets the tone of your next and future funding rounds.
Just as investors and VCs will evaluate you as a founder – or group of co-founders, you should evaluate your investor to ensure you’re a good fit. This will make your relationship a smooth and long-term one.
What do investors want to know: Your company’s early traction
Investors want to know how your target market has received your product or service so far. Were they happy with it? Was it helpful to them? How did they use it? All this falls under ‘traction.’ Investors will ask you:
- Has early traction for your startup been positive? Elaborate. Another way to phrase this question is: Tell us about the positive early traction your company has received in the past [months/year].
Your early traction can include one or more of the following:
- Partnerships
- A minimal viable product (MVP)
- Getting into incubator or accelerator programs like Y Combinator
- How your local or target market has received your product
- How customers feel about your product or service
- If you’re beyond your MVP, your early traction may include whether or not customers are buying your product or service
- Reviews or testimonials from customers (including beta customers)
Your early traction can also indicate where your product or service stands against the competition in the market.
Startup funding success: Create an effective pitch deck
As a startup co-founder, you know that the pitch deck is the first and foremost method in gaining investors’ interest.
You should, therefore, work hard to include the necessary information needed in a pitch deck. At the same time, you need to practice your pitch deck presentation several times to ensure:
- Your ideas are clear
- Your deck isn’t overly crowded
- You’re not trying to squeeze too much in too little time
- You’re not too fast –or too slow
- You deliver a presentation that entices investors and gets them to ask you questions, and hopefully a meeting afterwards.
Your pitch deck should range from 10 to 15 slides at most.
Remember: Rejection isn’t always bad
As a new founder, you should know you’ll get rejections. Not one or two, but many. And this shouldn’t put you off seeking funding.
However, it’s important to know why you’re getting those rejections and what you need to do to improve and go again after the funding.
Venture capitalists and venture funds (VCs) are generally picky about where their next investment is going to be. And it’s no surprise, there are fewer investors than there are startups.
Getting a ‘No,’ or getting declined, shouldn’t put you off. It should be a learning experience for you.
Why did the investors decline the investment? What do you need to do to make your business more enticing? These are all questions you may want to consider if you don’t get the funding approved.
At this point, we’re also assuming you’ve done your research about which niche this investor or investment firm prefers.
Wrapping it up
The process of raising funding for your business is a long and winding road. It’s one that will test your patience and all the skill sets you’ve acquired on your business journey.
You’ll need to work with your co-founders to ensure your startup is not just an idea or a just-starting-out-type-of-company.
To raise a pre-seed or seed round, startups need to be mature enough to handle both the fund-raising process and the funding they receive (if successful).
In addition to a mature-enough-company, you need a strong and clear pitch deck to show investors why they should invest in your company.
Setting up your business, conducting financial forecasts, and creating an investor pitch deck can be taunting.
If you need help creating financial forecasts, a cash flow plan, or a pitch deck, you can get in touch with us at Stride. We’ve helped startups in many industries create pitch decks and get their funding.
We also offer financial mentorship and advising services for co-founders.
Further reading: What Is Financial Mentorship? When & Why Do You Need It?
