Fundraising is complicated both for Founders and Investors - Founders want to propose startup’s upside potential to the investors and Investors try to fully understand the downside risks to the invested capital in the startup. The two perspectives may sound contradictory and confusing, but as whole, both parties are trying to address the two sides of the same coin – Risk vs. Rewards. Founders need to prepare a strategy to articulate both sides of the coin to different types of investors while fund raising.
Below are 20 basic questions you will hear from us while discussing an investment opportunity.
1. Who are your customers and what urgent problem are you solving for them?
We are looking for a simple and clear answer for who you are you selling the solution to. The reason is we try to learn and understand your insights how clearly you know about the pain point, and how big of a problem it is for the customers you are targeting. This usually leads to a conversation about Founder-Market fit and the size of the monetization opportunity.
2. What is your unique insight? What is unique about your solution?
We want to understand how intelligently you are proposing to solve the problem, and more importantly, we are trying to determine whether you have a unique insight i.e., Has anyone else thought about this before? How is it different from other solutions currently offered in the market? Do you have a secret? Why has it not been pursued so far? Why will market use it now? The more differentiated you are the more defensible the business might become in the future.
3. Why now? How did you go about validating the opportunity? Who did you speak to? How many potential customers you interacted with to get the insights?
This is a question that we often ask directly to founders as timing is everything and understanding why now is the time for your startup to be the winner is crucial part of the investment process. VC industry is full of examples where a product or service was too early or too late and as a result did not work or did not get as big as it otherwise could. Before Facebook there was Friendster, before Google there was Alta Vista. Even Uber was not the first company to think of on-demand rides, nor was AirBnB the first company to let people host others in their apartments. Why do you believe now is different? How did you validate that there is a need now? What changed or rather what has created this opportunity? What set of focus group you explored to find out the opportunity? Why do you believe now it will actually succeed?
4. What is the size of this opportunity (total addressable market) you have concluded?
How big is the market? This question matters a lot because VCs' economics force us to only focus on exceptionally large market opportunities so that we can own ~20% your business at exit to come away with a meaningful exit amount to return all, or at least a sizable portion, of our fund.
In addition, we expect founders to size up the accessible market, and do the calculation bottom up. Many founders show IDC, Gartner, Forrester reports about the large market opportunity/TAM they are playing in We seldom get impressed by industry analysts’ projections because when we ask founders which TAM number they believe or if they are aware of the assumptions the analysts have used, usually they have no clue. We have seen founders pitching they are playing in many large markets at the same time such as Network Management, AI/ML/Big Data, IoT and even Cyber Security by displaying TAM projections from various technology industry analysts.
We read such industry reports all the time as well, but it means nothing to us until entrepreneurs with their actual market insights start betting on this market. We want to see YOUR bottom-up market analysis with price points and customer counts etc. to understand your unique insights. We like founders who have spent time sizing up their actual addressable market using pricing and growth drivers as opposed to relying on third party industry analysts’ market reports.
5. How do you know you have product/market fit? How did you find Product-Market fit?
We will likely dig in to find how you think about attaining product/market fit or if you have already attained it. We will ask about how the customer found your product or vice versa, what they were searching for, why they decided to try it, what value they got out of the product, what complains they had about the product, how large this customer group is etc.
6. What is the architecture? What is the Tech stack? How does the solution work? What is the core intellectual property (IP)?
We usually ask to see the demo of your product, because a demo is worth a thousand words and we like product-obsessed founders who can demonstrate to us the RoI of their product instantly. We get excited to see passionate founders who get lost in the details of their product, founders who are thoughtful and at times, nerdy about features their team has built, and really understand customer needs. This gives us a lot of confidence to see the real reason why a founder is smart and why he/she has pursued a certain market opportunity. If the founders cannot demo passionately and take time to explain the value product prop to us, then we will probably pass, even if your customers get the value prop.
We also want to know about your tech stack and IP. We want to know various technology components of your solution. Are there things here that can be patented? What is the true innovation in the solution? Although SW patents have not been effective in recent years, depending on the type of business, IP can be an important issue.
7. Who are your competitors and how are you different? How are they approaching the same problem? Why your approach is better? Why is your business defensible?
We are looking to understand how knowledgeable you are about competitors and how you stack up against the players. If you say you do not have competition or if you bad-mouth the competition, it is a red flag. In fact, we would like to learn from you what they are doing well. Explain how you are different and why.
We want to understand what could happen to the business over time assuming founders can get a lift off. Long-term defensibility is difficult to predict, but we want to know various scenarios from founders on what could Year 3, Year 5 and Year 7 look like as this is a typical horizon over which more successful startups go public or get acquired for a significant return. Natural monopolies, early winner-take-all markets, and businesses with network effects are some of the factors that could prolong the business runway. This is a complex and important topic that is less likely to be top of mind for the founders but is certainly something we pay a lot of attention to.
8. Why you and your team? What is your Founder/Market Fit? Where did you go to school and work before? How did you meet your cofounders?
We are Market-First investors, and we want to get to the bottom of why you started the business to avoid investing/funding accidental founders. We pay awfully close attention to Market-Founder fit and whether you have unique insight and unfair advantage with deep domain expertise, massive vision, and passion.
In addition to understanding if you know the space, we want to understand if you are resilient and smart and how hard you have had to fight through your life to get to where you are. When things get difficult, and they always do, will you walk away? When you get knocked down, will you get up? We also look to see if you went to a top school, what you studied and what you learned as we are looking to assess your level of intellectual curiosity and honesty.
Learning about how you met your cofounders is telling as we want to establish if the if the team connection is solid, people trust each other, and you can make things together under the stressful environment of a startup. Take us through your journey where you and rest of the team went to school, where you worked and came together for this endeavor.
9. How are you measuring business growth? What KPIs are you using to track growth?
What indicators do you use and measure to drive the business progress? Lack of clarity or hesitation is a major red flag for us. We want to make sure you understand and measure your conversion and sales funnels, activation, retention, sales upside, churn, CAC, LTV, etc. We want to know how you think about relevant KPIs and will ask to look at your business dashboard to understand how conscious you are about growth. If you as founders are not clear about the metrics or are not measuring the right things in the operation to monitor health of your business, we have no reasons to believe that you can grow the business in future.
10. What is your current customer and revenue traction? Who are the top customers? How are they using it? What feedback are you receiving from current customers?
Founders usually mistake progress or free trials for traction. We think of traction as serious PoCs underway by several customers or revenue and already paying customers or significant testimonial by a highly regarded client in the industry, who may not have purchased a whole lot from the startup but have purchased enough to get started using the solution in production environment.
11. What is your business model? What are the pricing schemes? How did you decide on the pricing? How central will be the role of your solution in the large scheme of things?
We want to learn what use cases and customer segment or vertical you have decided to attack first. As the product becomes more proven and refined, you can always move sideways/upstream /downstream, but in B2B Enterprise segment, it is essential that you have laser like focus on the early adopters of the product. You can also focus on a specific vertical. For example, if you are a security software provider, you can first focus on BFS vertical or if you are selling SW DevOps tools, you could initially focus on freelancers and individual developers. Having a focus narrows down the opportunity but allows you to really perfect the product and sales.
If you say that you are focused on many use cases at once, then you likely have no product market fit and will likely lose to large incumbent vendors who have more capital + engineering resources at hand than you. We want to see that you have chosen/picked a peak in an entire mountain range to capture it and defend it. That is Product-Market play. We are looking for you to demonstrate that you have done customer research and competitor research while looking for you to acknowledge that you are early, and the pricing and business model might change. We want to understand how you will make money in the ecosystem, who your customers are, and how you are planning to charge them. Will you have recurring revenue? How key is the solution in the bundle of enterprise products of partners and other vendors? Usually there is a key control SW piece that extracts most value in a sale.
12. What are the GTMs? What are the customer acquisition and distribution channels? Who are the key Industry partners? Who are the key Technology partners? Who are the Channel Partners? Tell us who are playing with you or who is willing and may play with you?
In the B2B world, GTM is key. How are you planning to acquire customers? Will there be any partner model? We want to evaluate why a certain GTM will work vs. others. we want to know if you have an unfair advantage, like if you have worked in the space before and have a rich rolodex. We are looking to understand if you can secure key partnerships that can help you distribute the product faster and win the market faster. We want to understand how deeply you understand your channels and if you have figured out a growth hack or have an insight on how to acquire customers quickly and efficiently.
13. What are your unit economics? What are your CAC and LTV? How big are the typical small, medium, and large account sizes? What will be the renewal rates?
Unit economics give an idea about your business and we want to see who you will be partnering with to make a typical sale as in Enterprise segment, every player takes a cut, and they all look for what is in it for them to agree to play with you. We want to establish how fluent you are in operating a model and building strategic partnerships. We expect founders to know a few standard relevant industry terms, if not all, and have some idea of what they are. If a startup is early, we are fine to accept it as the numbers are likely to change in the future (typically, CAC goes up and LTV goes down). CAC conversation leads to the conversation about channels, marketing, and advertising spend. We are in Enterprise B2B focused; hence we will talk about sales cycle, cost of sales, customer on-boarding, customer success, account penetration, share of wallet, how it will change with land-expand, churn, expected life-time value of a small, medium, and large B2B customer.
14. What is your vision for the company, your North Star? What do you want to build?
Founders who stumble on this question are red flags for us as we want to back founders with a big vision. It reveals what you are not willing to compromise on. What will be your company be in ten years? If we give you $100M now, how will you deploy the capital to build out the company? This question reveals not only how you think about the business long term, but whether you plan for it to exist for a decade or more. Great companies are always flexible on their short-term approach, but not flexible on the end goal. If your plan is to sell quick, you will not have a broad long-term vision.
15. What are the key risks in your business and technology assumptions? What mitigations approaches you have in mind for them?
Why might you fail? We want to find out how you think about risks in your business, do you acknowledge risks, and most importantly, are you self-aware and intellectually honest. Great founders bring up and face risks head on. They do not try to shove them under the rug and ignore them. Risks range vastly from building incorrect products, to the market not being there, to the falling apart of a key channel deal. Whatever it is, be prepared to talk about risks with us and show that you have been thinking about them deeply yourself.
16. How much you have raised so far on what terms? Who are your existing investors? What have you achieved so far with the prior capital in terms of product development and business growth?
We want founders to tell us exactly how much is raised, and whether they did it on the note, or via equity. We want to see who is in the capital structure and equity cap table of the company and how/where they have added value so far. Learning more about the existing investors is also a good way to understand the probable future dynamics among investors.
Additionally, we would like to know how the capital raised earlier has been utilized and what results have been achieved as a result to date. It also gives an understanding of how much runway the startup has to raise the current round and how well the funders are going to use the capital from current round.
17. How much capital do you plan to raise in this round and on what terms? What sort of investors are you looking for?
Founders should have clarity on how much capital they should raise based on financial models. We are also looking at the maturity of the founders regarding negotiating the valuation of the startup and the degree of flexibility they have with respect to various aspects in a term sheet. We always ask what sort of investors the founders are looking for so that we can evaluate if we can help the founders in addition to providing capital. Additionally, it helps us to understand if the founders know what sort of investors they should bring on board in order to build their business.
18. What milestones do you want to achieve with this financing before next round? How much will you be burning in a month? When are you thinking of next financing?
Founders typically answer this in terms of specific product feature milestones and scaling of the team. This is not what we are looking for. We want to understand tangible business/financial milestones you will reach with the capital if given. In essence, we are looking to see if you will be fundable again in next round in 12-18 months, if you get the current funding, execute, and then hit specific milestones you are proposing. For example, if your plan says you raise $1MM in Seed, and then grow 20% MoM to achieve $50K MRR in 12-18 months, to founders this may sound great, but us investors it is clear that $50K MRR will not be enough to raise Series A. It makes sense for founders to really think through business milestones and where they want to land and why. Founders should have a financial model to back up the monthly or quarterly burn rates and cash flows.
19. How will you scale the team? Who do you plan to bring on board? How will you source talents?
We also want to understand if you have line of sights into hiring top notch talents in the ecosystem to build out the team who will drive the top line. How are you sourcing talents? Who are you already talking to? What will be the timeframe to come on board if they decide to join the startup? Where do you want these talents to be based out of? How will you compensate them? For example, engineering can be based in low-cost Geos that have great talents at affordable prices. Sales heads may need to be where major customers are to influence sales process. If certain other roles can be 100% virtual, founders should bring those views as well.
20. What will be your MoM/QoQ growth in customers and revenue with this financing? Do you have financial model with 2 Yr. quarterly actuals and 2 Yr. quarterly future projections along with key assumptions? When will you be profitable?
Founders need to make a growth assumption as they do not have a ton of historical data to back it up. But whatever data founders do have, including them in the model and explaining, helps establish credibility. Make your assumptions more concrete and realistic instead of projecting flat 20% QoQ growth with no underlying logic. Think through seasonality, and other factors that may influence your growth. Do your customers pay you right away or not? Does your cash in the door trail booked revenue? Reflect all the nuances in the cash flow model and your revenue forecast to look professional.
Becoming profitable is important for many reasons, but the main one is that it allows you to become self-sufficient and control a startup’s destiny. When you are profitable, you are no longer in need of external capital to survive. But many of the best startups reinvest revenues into the business and sacrifice profitability in favor of growth. When financing environment is relaxed, profitability may not be a crucial issue and founders can reinvest revenue, but when the financing environment become tighter, profitability discussion becomes central. We want to understand how you think about profitability, and tie this to the conversation about your burn and the need for follow-on financing.
There are many other investor concerns that founders should be ready to address, but these are a few Qs that should bring clarity to the fund raising process for founders.
/Service Ventures Team
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