Your Secret Decoder Ring for VC Speak
As an entrepreneur with big dreams and a killer idea, walking into an investor meeting can be a bit of a reality check. VCs aren't just going to fall over and swoon about your huge vision.
To sell VCs on your billion-dollar idea, you are going to get a cornucopia of questions thrown your way. Most questions dig into four issues for a company: market, strategy, financials and team.
While some may believe VC questions are off-base, realize there is a method to our madness: We want to know how prepared the entrepreneur is for the startup journey.
Here I break down a few common questions and provide insight into why are random inquiries, actually have logic behind them.
Q: Why hasn't there been a big company in this space yet?
A: When VCs ask questions centered around an industry or inquire about the number of companies in a sector, they are trying to assess the market size and timing of your product or service space.
Don't make the mistake of just saying, "This is going to be huge." If there is a lot of potential in the market for growth, you must support your claims with facts and a reason for why now is the right time to act.
Providing detailed, specific insights into technology and societal or business-model trends that make your idea ripe now will help a VC understand why the market is, or will be, large when you are serving it. For example, when my VC firm Scale Venture Partners invested in cloud-sharing company Box, we focused on the cost trends of cloud storage and broadband, and concluded a theoretically large market was about to emerge.
Q: Can you talk about customer acquisition costs?
A: When you are talking to VCs, you are talking about money. VCs will ask entrepreneurs all sorts of questions relating to financial information, as they want to invest in companies that can become market leaders and highly profitable on moderate amounts of capital.
For growth-stage companies, a lot of diligence centers on your ability to scale profitably. Questions about sales cycles, retention rates and account expansion possibilities let us mentally build a growth profit and loss in our head. We look at your financial model to understand your business sense. We then use that information to build our own model to predict the company's profits and our returns.
Q: Why won't a big company copy that feature?
A: Questions about your startup's features, advantages and uniqueness are asked to suss out what strategies you have in place to make your company sustainably different, lower cost or both. They are also used to probe your plan's longevity.
And don't get caught off guard, if VCs ask detailed, but seemingly unrelated questions regarding strategy. Some of the ones I have tossed out there include, "Where will you source your raw materials?" and "How did Company X gain advantage over Company Y back in 2005?" I am looking to assess the entrepreneurs understanding of her or his industry and strategy potential.
Also, if a VC asks why you decided to get involved in the market, it isn't just about your passions. This question also presses on your unique insights on customer needs and market dynamics to illustrate an emerging opportunity.
Q: What storms has your team weathered together?
A: "Tell me about your team" gets asked in almost every meeting. In addition to your resumes, we want to understand your relationships: Are your people naturally complementary? Did the leader attract great talent, or have to hunt for it? How does the team deal with stress? Can your initial tight team also attract and absorb new talent? While you may be able to spew out anecdotes about how wonderful your team is, keep in mind, VCs also watch your body language. Your actions speak volumes greater than words.
Understanding how you approach opportunities, people and problems color every question. Venture capital is a long-term investment business. If we invest, we'll be working together for years. Keep in mind, we're watching how graciously you manage the meeting, get us on topic and react to stress: It isn't a secret that every interaction is evaluative. The process helps you too, as you should be assessing whether the VC is the right partner for your endeavor.
What kinds of questions have VCs asked you during a meeting? Let us know in the comments below.