How To Answer Any Investor Question? (Part 4)

How To Answer Any Investor Question? (Part 4)

Useful tips from PitchBob (Part 4).

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.

#9 Customer- 5% of Questions

In the customer category, investors inquire about the customer experience and feedback. They seek social proof and assess whether there is a strong product-market fit.

The best customer for your business?

Investors want founders to have a deep understanding of their target customer segment, including their pain points and motivations. It’s crucial to define the ideal customer for your solution. Providing data-backed insights on customer demographics, preferences, and behaviors is highly recommended.

How many reviews have you received and how have you acted upon them?

While this question primarily applies to post-launch companies, pre-launch startups should also iterate based on feedback. Customer reviews serve as social proof and indicate market sentiment to investors. Additionally, feedback helps startups improve their product. Consider showcasing your customer review rating on the title slide of your pitch deck to establish credibility from the very beginning, assuming it’s positive. Utilize data to support your response.

Can you share a customer story showcasing product usage?

Customer use cases provide valuable insights into customer behavior and demonstrate how your solution integrates into their daily lives. If your product is complex or difficult to explain, include dedicated slides in your pitch deck that address this question specifically. Use concise and compelling examples to convey the value your product brings to customers.

Do you have data on customer churn due to poor service?

Exceptional customer service is crucial for startups. Addressing customer needs promptly and effectively not only prevents churn but also enhances customer satisfaction. Studies show that 67% of user churn can be prevented if a company resolves a customer’s issue on the first occurrence. Investors ask this question to understand potential flaws and evaluate your team’s ability to keep customers happy. Provide honest data and insights on customer churn related to service quality.

How do you plan to retain customers?

Customer acquisition is just the initial step towards growth. Investors place significant importance on excellent customer service and retention. They often prioritize increasing Customer Lifetime Value (CLTV) over mere customer acquisition, as focusing on this metric drives revenue without incurring additional costs. Clearly outline your strategies for customer retention, showcasing how you plan to foster long-term relationships and increase CLTV.

#10 Intellectual Property- 5% of Questions

Proprietary or legally protected technology serves as a powerful advantage for startups, granting them an unfair edge in their industry. Such tactics often establish a robust defensive position for the company.

How do you intend to protect your proprietary products/services legally?

If your startup has patented or patent-pending technology, it is important to highlight these innovations to investors. They value legally-protectable advancements that can give your company a competitive advantage. Additionally, if you have any other legal methods of safeguarding your inventions, now is the time to discuss them. It is essential, to be honest and transparent about the steps taken to protect your proprietary products/services.

How strong is your patent?

Not all patents have the same level of strength and effectiveness. The approval rate for applications by the United States Patent and Trademark Office (USPTO) is only 52%. Weak patents tend to be overly specific, intricate, or lengthy in their claims, whereas strong patents feature broad yet concise claims. Provide a clear and concise assessment of the strength of your patent to investors.

Who holds the intellectual property rights?

Ownership of intellectual property depends on contractual agreements and confidentiality arrangements. Founders should openly discuss with investors whether there are individuals outside the company who could lay claim to the startup’s intellectual property. Being honest and transparent about the ownership of intellectual property is crucial.

What assurance is there that your company’s intellectual property does not infringe on third-party rights?

Investors want to ensure that there are no conflicts with third-party intellectual property rights before investing in a startup. Defending against or dealing with intellectual property infringement can be costly and disruptive. Investors seek assurance that your company’s intellectual property is free from such violations. It is important to be honest and forthright about the measures taken to avoid any infringement issues.

What are your current and future plans for research and development (R&D) investments?

Innovation requires dedicated investments in research and development. Founders should have a clear and concise plan outlining their current and future R&D investments. Investors want to understand when and how these investments will occur and why they are necessary to maintain a competitive edge. Getting straight to the point and articulating the importance of R&D investments is key.

Are there any former employees or founders who may pose a challenge to these intellectual property rights?

Internal conflicts within founding teams can lead to legal disputes over intellectual property rights. If the creators of your company’s technology have departed without clear contracts specifying ownership rights, it can create complications. Founders should proactively address and resolve any potential issues related to IP rights before they become problematic. Honesty and transparency are crucial when addressing this question.

#11 Business Model- 4% of Questions

This category revolves around the startup’s revenue streams and their monetization strategy, particularly in terms of sustained or future profitability. For early-stage startups, the key is to demonstrate focus.

How does your company generate revenue? Please include pricing information.

Early-stage investors prefer a straightforward revenue model that is focused and stable. They prioritize a single, reliable revenue stream over multiple smaller or volatile ones. When answering this question, it’s best to highlight the startup’s primary products or services and their corresponding pricing structure.

What is your contingency plan if these sales channels are disrupted?

Relying solely on one sales channel, such as Facebook ads, can be risky. What if that channel suddenly disappears or loses effectiveness? Investors expect a backup plan that is equally viable as Plan A. Additionally, they assess the founder’s experience, skills, and commitment in handling potential obstacles that may arise in the future.

What is the typical sales cycle from initial customer contact to closing a sale?

For B2C companies, the sales cycle tends to be short, ranging from a few minutes to a few days. In contrast, B2B companies may have sales cycles that last weeks or even months. However, if a company’s Average Contract Value (ACV) reaches six or seven figures, a longer sales cycle may not be a concern. In any case, the faster a business can generate new revenue, the sooner it can reinvest in future growth. Supporting this response with relevant data is recommended.

What pivots has your startup made so far?

It often takes time for a startup to achieve product-market fit. Pivots involve strategic shifts based on market or customer feedback. By sharing the story of the startup’s journey, founders can demonstrate their team’s adaptability and responsiveness to changing forces. Being honest about past pivots and the reasons behind them is essential.

What additional revenue streams can be incorporated into your business?

While investors appreciate startups with a clear focus, they also want to see founders actively explore opportunities for future revenue expansion. Multiple planned revenue streams serve as a backup plan in case other channels are disrupted. Presenting a well-defined product roadmap and expansion plan supported by data will sufficiently address this question.

#12 Use of Funds- 4% of Questions

In this category, investors seek to understand how founders plan to allocate funds. It is crucial for startups to provide a high-level breakdown of spending, outlining key areas where the funds will be utilized to achieve specific business objectives.

How do you plan to allocate these funds?

Founders should clearly state their current funding requirements based on their company’s stage of development. It is important to distill the allocation into 5-7 key spending areas or buckets, such as sales and marketing, product development, or general and administrative expenses. Transparency and honesty are essential when addressing this question.

What portion of the funds will be allocated to founder salaries?

Founders naturally expect compensation for their efforts. However, it’s worth noting that the lower the founder’s salary, the more resources can be dedicated to company growth, such as product development or sales and marketing. Online studies have shown that the average annual salary for a CEO of a Seed-stage startup in the US is around $130,000. It’s important to be honest and realistic when discussing founder salaries.

What milestone will this funding help you achieve?

Many founders overlook this question in their initial pitch deck drafts. When raising funds, it is crucial to outline the specific objectives that the investment will enable the company to reach. For example, if raising a $2.5 million Seed round, founders should specify the numerical milestones that can be achieved with that capital, such as acquiring 100,000 new users, reaching $10 million in revenue, or securing the first five Fortune 500 accounts. Providing data-driven answers that clearly demonstrate the impact of the funding is essential.

How much of the funds will be allocated to overhead costs compared to expansion?

Similar to the previous question, every dollar spent on overhead costs means one less dollar directly contributing to business growth. The focus on revenue stems from the fact that increasing revenue is often the most effective way to boost a company’s valuation. As valuations increase, investors witness the growth of their investments. It is important to be honest about the balance between overhead costs and expansion, considering the potential impact on company growth.

#13 Marketing- 3% of Questions

Questions about marketing strategies, advertising, sales, and more fall under this category. Investors usually look for a mixture of marketing tactics that span the funnel, from tried-and-true to new and innovative.

How do you market your product or services?

Investors are interested in startups that have a clear marketing strategy to reach their target audience and drive sales. Building a customer base takes time and effort. The most effective marketing strategies are diversified and utilize a combination of efficient and impactful channels and platforms across paid, owned, and earned media.

Why have you chosen these marketing channels?

This question often follows the previous one. Ideal answers should be supported by data and insights about the target customers, justifying the selection of specific marketing channels. While a comprehensive explanation could be lengthy, founders should have a few concise, data-driven points prepared to explain the "why" behind their marketing or sales strategy. It’s important to connect each channel to a clear business objective.

What is your marketing budget?

Successfully launching and growing a company without outside investment, known as "bootstrapping," is a significant achievement. From an investor’s perspective, it demonstrates the potential of what the company could achieve with a dedicated marketing or sales budget. Conversely, if a company has been heavily investing in marketing without significant sales growth, it indicates a lack of product-market fit. Transparency about the marketing budget is essential in addressing this question.

How do you plan to acquire customers?

Investors seek smart and effective customer acquisition strategies. The more efficient and resource-friendly the strategies are for acquiring new customers, the better. Referred to as a "go-to-market strategy," founders should invest substantial thought into this aspect before engaging with investors. If founders lack a background in marketing or sales, it may be beneficial to bring in an expert to provide guidance.

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