7 Investor Questions Startup Entrepreneurs Need to Know How to Answer You have more of a chance of attracting investors if you can speak to these seven critical areas of a new business idea.
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With a fresh start to our year, a new list of aspirational resolutions, and the Consumer and Electronic Show (CES) for inspiration, ambitious entrepreneurs should be excited for 2016. And yet with that unbridled excitement and ambition comes the same challenges entrepreneurs have faced for years -- how to raise money for their startup idea.
As a consultant to startup entrepreneurs, I always see an uptick in individuals with new business ideas in January -- perhaps not coincidentally because of the alignment of new year's resolutions and the CES. As usually, I start by asking the entrepreneur if he or she is prepared for the hard truths of having investment partners -- which inevitably most have not considered.
Beyond that, if they are mentally prepared for the challenging task of raising money, I start by asking them a simple set of seven questions, all of which I expect them to know and speak credibly about before they ever step foot in front of a potential investor.
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1. Need: What problem does your product solve / market need does it fill?
The vast majority of new business ideas are just that: ideas. Entrepreneurs dream up solutions to problems that do not really exist, or rather only exist because of a personal need or experience. They then simply -- and wrongly -- assume everyone has the same problem.
While your business idea may be amazing, if it is not solving a problem for others, nobody else will want it -- and no investors will want to invest in it. To demonstrate need, you must have market research, which you can start simply by surveying as many people as possible. Ask not only if they need your product or service, but also if they would actually buy it.
If you receive positive feedback, take the survey to the next level by creating an online survey through SurveyMonkey and conduct focus groups. The more data you have, the more credibly your claim of need. Be cautious, as entrepreneurs tend to create bias in their questions or in their results. It would benefit you to have a professional help with your survey and focus group questions.
2. Market: How big is the market for your product?
When talking about your market size, you will need to be very specific about your target market -- age, geographics, psychographics, etc. It is best to look for niche markets that are not served or underserved in your industry to start, as they are the easiest and most affordable to gain traction. You should be able to speak credibly about the size of that market and the realistic share you can obtain.
This is where data is important, because just going on gut feeling to demonstrate your market share -- "If I just capture one percent of the U.S. population, that makes our market share 31 million people!" -- will instantly turn off investors.
3. Revenue: How will your company make money now and in the future?
I often consult with inventors who feel their product is a million-dollar idea, but few can answer when I ask, "Great, what do you do after everyone has one of your products?"
The truth is, creating a business is easy -- creating a long-term sustainable business that investors want to back requires forward planning and a vision.
This part of your consideration includes not only how you are going to make money from your product or service, but how you will also manage the long-term growth. Will you sell a subscription? Will you develop ancillary products or product extensions? You may not have the next five to 10 years completely planned, but you need to consider and be able to speak confidently about it.
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4. Defensibility: What are the barriers to entry for your competitors and new market entrants?
I once spoke with a client who had a great product idea that filled a real need in the market. There were a couple of large, well known companies in the industry, but none had developed a product exactly like his. When I inquired about how he would fend off these competitors from developing their own version of the product, his response was, "I will sell them mine."
While a completely valid strategy, selling to a competitor requires that you create something worth buying. Maybe your competitors would be interested in purchasing your idea, but it is in their best interests to calculate if it would be more feasible to start from scratch or buy yours. If you have nothing to defend your product, the former is usually more feasible.
Also, an investor wants to know that their money is going to be protected. First to market is a reasonable strategy, if you grow your user base quickly and establish customer loyalty. Of course, that is never as easy as it sounds, and if your product is easily imitated by a better-funded startup or established competitor, it is only a matter of time until they do.
5. Team: How is your management team uniquely positioned to execute on this idea?
Once you have established the need and the market size, only one other thing will be of interest to investors: execution.
You need to demonstrate that you have assembled the management team that can execute on your idea and create value in the company. This includes building out an minimal viable product, acquiring and retaining customers and creating a business that is sustainable long enough for the investor to get their money out. You should be able to tell investors how you will get your first customer as well as the 10,000th -- or one millionth -- customer.
This is not the time to be bashful. You should tout your experiences and skills and those of your team. It is about instilling confidence in your investors that you can get the job done.
6. Exit: How does the investor achieve liquidity?
Most entrepreneurs get into business for the long run. No investor, however, wants to wait a lifetime to see a return on their money, family and friends excluded. If you are seeking investment capital, you should be prepared for the reality that you will need to sell your company or bring in another round of investors within five to 10 years. This can be achieved either through acquisition, merger or initial public offering (IPO), but it has to be realistic (what is the history of mergers and acquisitions in your industry?).
In the end, an investor wants to be assured that you are willing to eventually sell your company, so they can cash out, and that you have a credible, realistic and timely exit strategy to do so.
7. Impact: How does your business benefit mankind?
In the past, investors mostly looked to businesses to achieve a return on investment. These days, a growing number of investors want to know they are making a positive impact on the world with their money. You may not be feeding the world's hungry children, but if you have philanthropic or corporate social responsibility goals, you should definitely include them in your pitch.
Impression is everything when it comes to raising capital, and knowing your business inside and out is key to success. And while an investor you meet may not invest with you, it may be simpl,e because you do not fit his or her investment profile. If you have made a good impression, however, they may be able to direct you to someone who can help.
Conversely, if you go into a meeting unprepared, you may very well burn bridges that you never had the opportunity to cross.
Related: 5 Wrong Answers When Pitching Investors for Capital