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#6 Investment- 7% of Questions
This category explores the investment aspects of a startup and includes inquiries regarding the company’s exit strategy, valuation, and more.
How do you determine the current valuation of the company?
Founders cannot simply state, "We think we’re worth a huge amount." The approach to calculating valuation varies depending on whether the startup is pre-launch, post-launch, pre-revenue, or post-revenue. Valuations also differ based on previous investments, industries, and industry significance at a given time. Here are a few average pre-money valuations as of Q3’21: Pre-seed = $11.1 million, Seed = $22.2 million, Series A = $84 million. Utilize available data to support your answer.
Is the valuation realistic?
Determining valuations, particularly for pre-launch and pre-revenue companies, can be subjective. Founders should research industry benchmarks and the investment history of competitors to establish realistic valuations. Founders who require assistance in this area should seek advice from a startup financial advisor. Support your answer with data.
What is your exit goal? (e. g. IPO, M&A)
Investors often expect startups to have an exit goal before entering a pitch meeting. This response helps investors comprehend the company’s potential future trajectory. The main exit strategies include 1) IPO (initial public offering), which involves listing the company on the stock market, and 2) acquisition, where the company is sold to another entity. Provide a concise answer.
When do you anticipate conducting another round of fundraising?
Typically, with each new funding round, a company’s valuation increases. Consequently, the value of shares owned by investors from previous equity financing rounds also rises. Owning 20% of a $5 million company is less valuable than owning 10% of a $100 million company. Additionally, this question aims to understand how quickly a company will utilize its latest round of financing, known as "runway," which generally lasts 12-24 months. Be honest in your response.
How else do you expect an investor to assist, apart from providing funds?
In addition to financial assistance, investors and venture capital funds often offer support through connections, expertise, or access to resources. Over the past 5 to 10 years, the Venture Studio model has gained popularity, providing invested companies with complimentary access to a range of expert resources. This model benefits both the startup and the investor. Get to the point when answering this question.
Who else has shown interest?
Navigating this question can be tricky. Some parties prefer to remain anonymous during the early stages of fundraising, while others may be more open about their interest. Founders should strike a balance between demonstrating interest from other firms (if applicable) and respecting the need for confidentiality. Be honest in your response.
How much funding are you seeking at present?
The general rule is for founders to request the amount they need. However, numerous strategic factors influence the amount and timing of fundraising for a startup. For example, pre-launch companies may seek a smaller round to complete development and a larger one for growth. Regardless, founders should provide a simple and straightforward answer. Get to the point.
Who are your current investors?
As mentioned earlier, being backed by notable investors or venture capitalists serves as social proof. Generally, if one investor is willing to invest in a company, it indicates the company’s potential to attract others. Provide a concise response.
How many previous investors will participate in this round?
The participation of previous investors in subsequent rounds signifies their confidence in future growth. Additionally, follow-on investments from previous investors often result in an increased ownership stake, indicating their belief in the company’s present or future growth potential. Get to the point in your answer.
#7 General — 6% of Questions
This category encompasses a collection of broad and comprehensive business inquiries. Investors delve deeper into the details of a startup to gain a better understanding of the opportunity it presents.
What are the risks for your business and what is your mitigation plan?
Investors aim to minimize their risk, given the high failure rate among Seed-round startups. Through the due diligence process, significant issues are often uncovered, so founders should be honest about any risks. It is crucial to have a clear action plan to address each threat.
What makes your company unique?
With numerous new businesses emerging each year, investors receive numerous startup pitch decks regularly. Some startups may address similar problems or target similar customer segments. Uniqueness can take various forms, such as patents, team expertise, early traction, proprietary technology, and more.
What mistakes have you made in the past and what have you learned?
This question allows investors to assess the founders’ leadership styles and their ability to overcome challenges. Openly admitting and learning from mistakes demonstrates resilience and growth. Claiming to have never made mistakes raises suspicions among investors. It is better to acknowledge errors, learn from them, and incorporate the lessons learned.
Why is now the right time for your startup?
Investors seek a time-based answer to this question. Factors such as increased funding in the startup industry shifts in consumer behavior, legislative changes, or technological innovations may make the timing opportune. Backing your response with facts and credible sources is essential.
Where is your headquarters located?
Company location holds significance as different regions have varying laws and can impact the business and its investors. It can also provide access to customers, employees, transportation, and necessary resources. However, for companies with a distributed workforce, this may be less important.
Why have you chosen this method of raising capital?
When asked by an investor seeking an equity stake, founders should have a clear understanding of why they have opted for a particular financing method over others. Venture capitalists often offer more than just capital, including expert resources and guidance to support the company’s growth.
Would I be proud and excited to invest in this startup?
Founders should consider if their business is creating a brand that would make an investor proud. This question may be more self-reflective for investors, but it is crucial for founders to keep in mind. Pride can stem from the mission, design, innovation, or other aspects of the business.
Has the startup successfully turned me into its biggest fan?
While primarily directed at investors, this question is equally important for founders. Converting an investor into a passionate fan during a pitch indicates a positive impression. Excitement and passion can be generated through elements such as the team, mission, or unique ideas.
What alliances or partnerships have you formed?
Collaborations and strategic partnerships contribute to building great companies. Alliances serve as a form of social proof, and quality is essential. A single partnership with a reputable person or organization can have more impact than several lesser-known ones.
What’s the worst thing that has happened since starting this project?
Although somewhat dramatic, this question is important. Founders should share a story of a significant failure or setback and demonstrate their resilience and ability to persevere.
What barriers to entry or scale do you face?
This question addresses the obstacles a company needs to overcome to grow and gain market share. Barriers to entry may include incumbents in the industry, high overhead costs, long lead times, and more. Scaling issues focus on increasing revenue without proportionally increasing costs, such as people or non-digital processes.
Which part of the business is currently the most challenging?
Beyond financial support, investors often serve as advisors to the founding team. They are interested in identifying any significant obstacles that may hinder growth. Founders should be transparent about challenges and have an action plan in place or in progress to address them.
Can you increase volume without a proportional increase in headcount?
Many investors prefer tech-based businesses that can grow revenue without scaling up costs proportionally. People and team size can be barriers to revenue growth for some companies. Even service-based businesses should leverage technology to enhance productivity, reduce costs, or increase revenue.
#8 Market- 6% of Questions
This section covers the potential size of the opportunity and the target market of the startup. These inquiries aim to ascertain the growth potential of a particular industry, sector, or geographic market from an investor’s perspective.
What misconceptions exist about your field among outsiders?
Investors may pose this question to assess the founder’s understanding of the industry they operate in. Alternatively, it serves as an opportunity for the startup to provide further insights into its market and industry, potentially impressing the investor with previously unknown information.
What market need are you addressing?
The purpose of businesses is to solve problems, regardless of their scale. This query helps investors gauge the relevance of the startup’s solution in the market. Founders should compare their startups to industry leaders and existing alternatives.
Which market segment are you targeting?
Investors are seeking startups that focus on a specific market, target audience segment, and problem. Examples include in-house IT teams at large enterprises, small and medium accounting firms, or middle-income millennials who travel abroad more than twice a year, among many other segments. A concise answer is recommended.
How much do your customers currently spend in this area?
As mentioned earlier, before the advent of cars, people still spent money on horse and buggy transportation. Finding out how much the startup’s solution disrupts existing market expenditures is valuable. For instance, how much do enterprises on average spend annually on managing their remote workforce? How much do dentists spend each year on accounting software? If such data is not readily available online, founders should consider conducting surveys among their target audience.
What is the TAM/SAM/SOM?
TAM/SAM/SOM is a common acronym found in pitch decks. It represents Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM). TAM refers to the overall market size, often in the billions. SAM is a subset of TAM, focusing on a specific region such as the North American market. Lastly, SOM represents the revenue a startup realistically expects to capture, always being the smallest of the three.
What is the market’s growth rate?
Founders typically respond to this question by providing the Compound Annual Growth Rate (CAGR) for their industry. CAGR indicates the industry’s growth rate over a specific period, usually spanning multiple years. High-growth industries typically exhibit CAGRs of 30% or higher, while low-growth categories tend to be in the single digits. CAGR data is widely available online for almost every industry.