How To Answer Any Investor Question? (Part 2)

How To Answer Any Investor Question? (Part 2)

Useful tips from PitchBob (Part 2).

Brief outline of this article

We’re here to help train you on how to pitch and improve your answers to tricky VC-style questions — PitchBob’s AI VC Coach.

#3 Solution- 8% of Questions

The question "What do you do?" is crucial for investors as they seek a clear and concise understanding of your product or service and its problem-solving capabilities. Investors want to grasp the core functionality of your offering and how it addresses a specific need or pain point.

Why would anybody want this?

Despite the direct phrasing of this question, the underlying intention is to understand the value proposition and benefits of the product or service. Start by identifying the specific, powerful benefits that the solution offers. Focus on how it solves a problem or addresses a need. For example, if the problem is a low conversion rate, emphasize how the solution leads to a higher conversion rate. Be concise and highlight the key benefits of the solution. Use data to support your response and provide evidence of the value proposition.

How differentiated is the company’s technology?

It is important to avoid claiming there is no competition as it may raise concerns about the market potential. Instead, be open about both direct and indirect competition and discuss the technology employed by the company to drive revenue. Balance your response by highlighting the startup’s technological advantages while acknowledging any potential disadvantages. Present data and concrete examples to illustrate the differentiation of your technology compared to competitors. Humble bragging is acceptable as long as it is supported by evidence.

What are the major product milestones?

Investors want to understand the current status of the product or service, particularly for pre-launch companies, and the steps taken by founders to reach that point. For post-launch companies, emphasize the evolution of the product or service since its launch, showcasing how it has improved based on user and market feedback. Demonstrate active listening to feedback and highlight significant milestones achieved. Be honest about the progress made and any challenges faced along the way.

What have you learned from early versions of the product or service?

Similar to the previous question, investors want to see a startup’s ability to pivot and optimize based on market feedback. Whether pre-launch or post-launch, emphasize the testing and learning process that has taken place. Share concise and impactful insights gained from early versions of the product or service and explain how these learnings have influenced its development. Be honest about the lessons learned and demonstrate a proactive approach to improvement.

Why is this the right time for this product or service?

The essence of this question is "Why now?" Provide a compelling rationale for why the current timing is ideal for the product or service. Highlight market trends, customer needs, or industry shifts that make the solution highly relevant and necessary at this moment. Convey a sense of urgency and explain why the timing creates a unique opportunity for success. Get straight to the point and emphasize the timeliness of the solution.

What product offering will you begin with and why?

This question specifically targets pre-launch companies. Investors want to see founders with a focused approach, starting with a single, primary offering and a direct revenue stream. Avoid trying to do too much simultaneously, as it may indicate a lack of focus. Use data to support your rationale for choosing the initial product offering and explain why it holds the most potential for success. Demonstrate market research and customer demand to justify the chosen launch offering.

Why is the company’s product great?

While similar to the first question, this one focuses on highlighting the superiority of the solution compared to competitors. Utilize data to demonstrate how the startup’s product outperforms alternatives in the market. Showcase specific features, functionality, or performance metrics that set the product apart. Emphasize the unique value proposition and explain why customers would choose the company’s product over others. Utilize data and humble bragging to support your claims.

How often do you envision enhancing or updating the product or service?

Acknowledge the importance of launching the product or service initially. However, investors are interested in a long-term perspective. Provide a clear plan or interval for rolling out new features, updates, or additional offerings. Show a commitment to continuous improvement and staying ahead of the competition. Convey your understanding that businesses need to evolve to meet market demands and showcase your readiness to enhance the product or service on an ongoing basis.

Describe the use cases for your product.

To effectively describe how the product or service works, provide concrete use cases that demonstrate its practical application in customers’ daily lives. Explain how the solution fits seamlessly into their routines and addresses specific pain points or needs. If there are any challenges in justifying the solution, immediately follow up with relevant use case scenarios to clarify its value. By presenting relatable examples, you can better communicate the real-world impact and benefits of the product or service.

What changes have you made based on feedback?

Building on the importance of acting on feedback, investors want to know the specific actions and improvements implemented in response to feedback received. Highlight how you have actively listened to customers, investors, and other stakeholders and demonstrate a willingness to adapt and evolve the product or service accordingly. Be honest about the changes made, whether they involve functionality, user experience, pricing, or any other relevant aspect. Show your commitment to delivering a better solution based on valuable insights from your target audience.

How did you come up with this idea?

Investors are often curious about the origin story behind a startup. Before beginning the pitch presentation, provide a brief 30-second overview of how the idea for the startup came to fruition. Explain the journey of how the solution evolved into its current form and discuss the market forces or specific experiences that influenced its development. By getting straight to the point and showcasing the factors that shaped your idea, you can give investors insight into the motivation and relevance of the solution.

What technology are you using?

This question applies not only to technology companies but also to various industries such as packaged goods, manufacturing, healthcare, and more. Investors seek to understand the technology leveraged by the startup to produce or deliver its product or service. Clearly explain the key technologies utilized and how they contribute to the competitive advantage of the startup. Whether it’s proprietary technology, in-house solutions, or unique access to certain technologies, provide a concise overview of the technological foundation supporting your offering.

How easy will it be to replicate your technology?

Investors want an honest assessment of the level of protection surrounding your technology. Discuss whether your technology is patented, proprietary, or built in-house, as this can determine its vulnerability to replication. If your startup relies on off-the-shelf technology, acknowledge the potential ease of replication by competitors. However, also highlight the potential opportunities for quick acquisition that such technology might present. Be transparent about the protective measures in place and any intellectual property rights that safeguard your technology.

How easy is it to use or integrate?

Studies have consistently shown that a great customer experience significantly impacts purchasing decisions. For B2C tech companies, focus on providing a user-friendly and seamless onboarding process. For B2B tech companies, highlight a low barrier to adoption, ensuring that integrating your solution is not overly complex or time-consuming for customers. Contrast your solution with those that require extensive effort or the replacement of existing systems. Demonstrate honesty in assessing the ease of use or integration of your product or service.

Is the product stable and scalable?

Product stability is vital when seeking growth capital, as a negative customer experience can have a significant impact on a company’s reputation. Investors want assurance that your product is stable and free from major issues. Additionally, they look for scalability potential, where selling more of the product or service does not result in a linear increase in costs. Discuss how your product’s stability has been tested and validated, and demonstrate plans for scaling efficiently. Highlight partnerships or capabilities that facilitate large-scale production or distribution. Be transparent about any challenges and how you address them to maintain stability and facilitate growth.

#4 Competition- 8% of Questions

Investors seek confidence in founders’ industry expertise and may also want to gain insights about a specific sector through the founder’s knowledge.

Who are your direct and indirect competitors?

It’s important to acknowledge and understand the competition. Claiming to have no competitors may suggest a lack of market demand. Identify direct and indirect competitors by considering where customers previously spent their money. Honesty is crucial in addressing this question.

What are your strengths and advantages over your competitors?

Investors want to know your unique selling proposition (USP) and how your startup thrives in a competitive market. Highlight the specific benefits and advantages your startup offers compared to competitors across various aspects of your business. Be transparent and back your claims with evidence.

How do your features differ?

Differentiate your product or service by highlighting specific features that set you apart from competitors. Use a competitive grid to compare your offering to direct and indirect competitors. Keep it simple and focus on primary features that provide a clear advantage. Again, honesty is key.

How do you compare on price?

Positioning your pricing strategy within the market is essential. Explain your rationale behind the pricing strategy and how it compares to competitors. It’s not about undercutting prices but rather demonstrating a strategic approach.

How do you compare on customer satisfaction?

While obtaining comparative data on customer satisfaction can be challenging, utilize surveys or publicly available data such as online user reviews. A higher customer satisfaction rating compared to competitors is a positive sign for investors. Pre-launch companies can gather initial user feedback and make comparisons.

How do you compare on service?

Demonstrate your understanding of customer experience by showcasing relevant data or feedback. Highlight any areas where competitors fall short and explain how your startup excels in creating an industry-leading experience. Utilize data to support your claims.

Who do you aspire to be like?

Share which startup, regardless of industry, inspires you as a founder. Be sincere, let your passion shine through, and provide a rationale for why that particular startup serves as your metaphorical North Star. Tailor your answer to the context and be honest.

Who do you least want to be like?

Avoid criticizing competitors that an investor may already support. Be honest and tactful in your response, considering the investor’s existing relationships. It’s a trick question, so navigate it carefully.

Why isn’t someone already doing this?

Highlight significant barriers that have hindered progress in the industry, such as regulations, supply chains, resources, or outdated models. Demonstrate how your startup has overcome these barriers in a way that competitors haven’t been able to.

What is the competitive landscape and how is it evolving?

Provide an honest assessment of the competitive landscape and showcase your in-depth research. Investors may either be well-versed in the category or seek insights from founders. Be objective, back your findings with data, and demonstrate your thorough preparation.

Why can’t competitors duplicate this technology if it’s so clear and simple?

A single innovative feature may not be sufficient to defend against established competitors with greater resources. Highlight other defences, such as your business model, legal protection, target customers, or additional unique aspects that make your startup more than just a single feature.

What are the size and funding of your competitors?

Know the size and funding status of your competitors. Well-funded competitors can indicate a thriving market, and it doesn’t necessarily mean your startup is too late. Use data to provide accurate information and show market momentum.

What are your weaknesses or disadvantages?

Transparency is crucial when discussing your startup’s weaknesses. Striking a balance between honesty and maintaining a positive image is essential. Avoid being overly critical or disregarding weaknesses altogether. It’s a trick question that tests your ability to present a balanced view.

What is to stop another larger company from doing the same thing?

Consider incumbents in the industry and their limitations. Legacy products, outdated systems, or the high cost of re-creating their offerings for modern platforms can serve as barriers for larger companies. Look across your entire business model to identify aspects that provide a competitive advantage and make it challenging for larger companies to replicate your startup’s success. Clearly communicate these factors to investors, focusing on why your startup is uniquely positioned in the market.

#5 Financials- 7% of Questions

Financials are often regarded as a mysterious combination of black magic and alchemy. It is widely acknowledged that predicting the future is impossible, and investors are aware of this fact. There is a common saying among investors that we frequently hear: "Financials will be incorrect; it’s just a matter of how incorrect they are."

Are the company’s financial projections both realistic and intriguing?

The notion of "realistic" is incredibly subjective. In fact, this question will be the subject of an upcoming research project we plan to conduct with one of our partners. When considering realism, we must ask ourselves: Can a company achieve $1 million in revenue with $100,000 in funding (a 10x scale)? Perhaps. However, can a company achieve $100 million in revenue with only $1 million in funding (a 100x scale)? Probably not. Please be honest in your assessment and rely on data for support.

What are the fundamental assumptions that underlie your projections?

When asking this question, investors are interested in gauging the level of effort a founder has dedicated to their financial projections. Do these projections rely on actual data, survey data, and industry benchmarks, or are they simply conjectures? Real-world data is always preferable, and for pre-launch companies, survey data serves as a reliable proxy. As a safe bet, it is advisable to utilize industry benchmarks and avoid making unfounded guesses. Please support your assumptions with data.

What is your monthly burn rate?

The term "burn rate" refers to the rate at which a startup consumes cash, typically calculated on a monthly basis. Here are a few average figures from a 2018 study: Pre-seed = $18,000, Seed = $75,000, Series-A = $400,000, Series-B = $500,000. It’s worth noting that burn rates can vary based on industry and geographic location as well. Please refer to the data for accurate estimations.

What are your per-customer acquisition costs?

Customer Acquisition Costs (CAC) represent the amount a business spends to acquire a new customer. A closely related metric is the ratio of CAC to Customer Lifetime Value (CLTV). Here’s why this ratio is important: If a company spends $100 to acquire a customer who generates $100 in revenue, the ratio is 1:1. However, if another company spends $100 to acquire a customer who generates $300 in revenue, this metric is significantly more favorable. Please rely on data to assess this aspect.

How long will it take for your company to become profitable?

Investors understand that achieving profitability is not an instantaneous process and often takes years. Despite this inherent risk, investors continue to invest because the majority of their returns come during pre-IPO rounds, where company valuations are based on revenue rather than profitability. Nevertheless, founders should always have a clear roadmap to profitability in order to assure investors that it is an achievable goal. Please provide data to support your projections.

What is the average customer lifetime value for your company?

Customer Lifetime Value (CLTV) is the average revenue generated by a single customer over their entire duration as a customer. For example, if the average customer remains with the company for three years and spends an average of $150,000 during that period, the CLTV for the startup is $150,000. As mentioned earlier, this metric is often compared to Customer Acquisition Costs (CAC) to evaluate the financial health of a business. Please utilize data to determine CLTV.

What profit margins are you currently operating on?

The profit margin is calculated by subtracting total costs from total revenue and then dividing the result by revenue. Profit margins can vary significantly based on business models and industries. It is not uncommon for early-stage startups to experience negative profit margins for a few years before attaining profitability. Founders should have a thorough understanding of the profit margins specific to their industry. It is important to rely on data to assess and communicate the profit margins effectively.

What are your monthly personal expenses?

Investors are aware that a portion of the raised funds will be allocated to the founders’ personal expenses. Founders who rely on high monthly salaries to cover their expenses may face a disadvantage compared to those with lower monthly expenses or alternative sources of income. It is crucial to be honest about personal expenses to provide a transparent financial picture.

How healthy is the cash flow in your business?

Cash flow refers to the net balance of cash movement in and out of a business during a specific period. Investors typically seek positive operational cash flow, where the inflow of money into the business surpasses its expenses. In the startup world, there are three types of cash flow: cash flow from operating activities, cash flow from investment activities, and cash flow from financing activities. Data should be utilized to assess the cash flow situation accurately.

Do you have knowledge of comparable figures for similar businesses?

Answering this question demonstrates that the founder has done their homework. It is beneficial to be well-researched and knowledgeable about the operating financials of comparable businesses or competitors. Understanding how a given startup compares to others in the same market provides insights into its financial health. Utilize data to support your knowledge of comparable numbers.

How much equity and debt has the company raised in the past?

Startups have the option to pursue debt financing, equity financing, or a combination of both. Debt financing involves obtaining a loan from a bank that is repaid over time. Equity financing involves offering ownership in the company, usually in the form of shares, in exchange for investment funds. Investors asking this question are interested in understanding the funding history of the startup. Utilize data to provide accurate information on the equity and debt raised.

What portion of the stock option pool is allocated for employees?

Founders often set aside a specific class and pool of shares dedicated to employees. This strategy helps attract talented employees to the startup. The allocation of stock options to employees is commonly referred to as an option pool. Typically, option pools range between 10% to 15% for early-stage startups and can go up to 20% for public companies. Data should be used to determine the appropriate allocation of the option pool.

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