Top Seven Questions that Investors Ask Start-ups & How to Handle Them
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A start-up pitch with investors inevitably leads to a specific set of questions. From the investor’s perspective, the objective of these questions is to determine whether this new venture fits their investment portfolio and will yield lucrative results. These questions are crucial to your pitch and will influence an investor’s decision. To ‘make the cut’ entrepreneurs must be prepared to articulate and answer the following questions.
1. What are the Benefits of Your Product and What Market Needs Does it Fulfill?
In-depth understanding of the product or service that you plan to sell is essential to your pitch with the investor. The market gap you plan to fill or the solution you provide must be clearly defined. It is essential to highlight your target audience, their needs, why a buyer would choose your product over others, and what they would pay for it.
It is important to understand your target audience’s interests, behavior, buying patterns and more. For start-ups, the process of gathering this information can take time and research, but cannot be ignored. It is ideal to create your niche while defining your target audience.
To develop your understanding of the market and audience, gather data and research, and based on your findings determine your service or product’s validity, longevity, and scope.
2. Are your Calculations Realistic?
Reflect on the market dynamics and share your start-up’s expected growth numbers for the future. For any pitch to succeed, it must present realistic calculations. Does your product/service provide an incremental value in the form of revenue and profitability? The investor will be particularly concerned with your business’s longevity and sustainability. Investors usually look for proposals with high returns and a clear exit strategy.
3. What Differentiates your Product?
Spend time explaining your unique selling proposition (USP): product quality, features, positioning and of course the team's core strengths and achievements. Highlight key differentiators that set your product/service apart from what is already available in the market. The start-up should lay down its plan for scaling-up with timelines that indicate their growth strategy.
It is important to recognize that no USP can sustain forever. It is only a matter of time before another competitor copies or changes the rules of the game and begins to provide the same or a similar product/service at either a better price or with better features / superior performance to the target audience. One should plan ahead to handle this inevitable situation.
4. What do You and Your Team bring to the Table?
When you pitch your business, you are also pitching yourself. You want to highlight your past achievements and profound knowledge of your business-domain. Investors bet on people and tend to have more faith in those with a track record of high performance. You must highlight and communicate the passion, experience, knowledge, domain expertise, and commitment that you bring to the table.
5. How Well do you Know Your Competitors?
From a brand and an industry point of view, referencing your competitors in front of an investor is preferable to not mentioning them at all. Not only does this show a promise in your operating market, it also provides insight on your understanding of market dynamics and how you hold an advantage over your competitors. Exploit your knowledge of the industry and define the strength of your brand and offerings.
6. How will the Investor make Money by Investing in Your Project?
Apart from explaining the scalability of the business, it is important to describe its revenue model. Investors are keen to know their return on investment and are particularly interested in your profit margins, the potential to make money, and the increase in valuations of your business. While most will quickly understand whether or not there is a possible exit strategy for them, it never hurts to share your game plan to increase their valuations and your possible opportunities to make money on their investments.
7. How are You Going to Use our Money and When will You Run Out of Funding?
Investors like to have all their bases covered. They prioritize knowing how their funds will be used and where the company sees itself in the coming years. As a start-up founder, you must have a comprehensive business plan with a fair assessment of your projected costs, utilization and deployment of their funds, indicative timelines on drawdown, and a tentative ROI. It is important to give them a true picture of your funding situation and specify if you will require more funds in the future. Your answer must include a tangible monetary milestone, which will help you gain your investor’s trust; no one appreciates surprises when it comes to money.
Fair winds and following seas to my fellow entrepreneurs!