Venture capitalists invest in a startup that effectively demonstrates how it is “all in” for persevering to develop business – whatever it takes. Over the last four years, we, at Unitus Seed Fund have evaluated nearly 3,000 startups, to finally invest in 25. This demonstrates an important factor – a yield of 1%. So, how do VCs really assess a potential startup? We thought it would be helpful to put together a list of 30 key questions across 10 areas that every entrepreneur should answer during their first pitch –
Questions On The Startup Team
While every startup team must have certain key competencies such as domain experience, business acumen etc. to take the business ahead, what’s critical is the right attitude and passion. In the absence of certain skill sets, advisors can play a vital role. But ultimately, it’s the core team that will run the business. So, expect that you’ll need to cover the following –
- Why is your team the best team to back?
- What skill sets is your team currently missing? How do you plan to fill these?
- How much and what kind of guidance do you expect from your investors?
Questions On Startup Traction
At the seed-stage, investors aren’t looking to fund business plans or ideas, but companies that have demonstrated at the very minimum, a product-market fit. In simple words, they need to see “proof of demand” i.e. some traction with customers. Hence, here’s what they want to understand –
- Who is your customer?
- What have you learnt about customer demand for your product or service?
- What progress (in numbers) have you made so far? Why is it interesting?
Sustainable Differentiation In Your Startup
Once upon a time, Google was nowhere close to being in the top 10 search engines! Quite unbelievable, isn’t it? While not everyone can create the next big (Google) product, everyone can incrementally innovate and ultimately that’s important – to provide something that’s different and valuable from the existing options. Remember, VCs aren’t looking to fund a slightly better mousetrap. So, here’s what you will need to convince potential investors about –
- Explain your short-term, medium-term and long-term differentiators.
- Do you have any intellectual property? If yes, provide details.
- How quickly or easily can another team copy your product or service?
Dealing With Startup Competition
Competition comes from everywhere. Investable teams are those that are aware of this. While investors are willing to work with you on your weaknesses, you must be mindful of your own weaknesses. Your business should hence be worked on with complete consciousness of your and your competition’s strengths and weaknesses. Here’s what you can anticipate –
- Who are your current and likely competitors? (India/global)
- What are your weaknesses versus competitors? How do you plan to address them?
- What are your strengths versus competitors? How do you intend to leverage them?
How Does Your Startup Impact The Community
Impact investors seek to back businesses that will make big money as well as create significant impact. They look for entrepreneurs who are excited about the power of the next billion and are working on innovative ways to address the many opportunities to make the lives of the less-fortunate better. Investors are likely to fund those businesses which have impact built into their business models so as their business scales, so will the impact –
- What are the existing alternatives to your business and why is your solution better especially to the BPL (Below Poverty Line) segment?
- How will your business tangibly improve the lives of your impact base? Quantify.
- How will your impact scale?
Questions On Startup Scale
Scale is very important because, fundamentally, it’s a proxy for sustainability and growth. Investors invest in businesses that they foresee to grow at least 10x over the next 5-7 years horizon. So, it’s only natural to look for businesses that are addressing a large market –
- Describe your revenue model.
- Describe your cost economics. Do you have to spend more to generate more?
- How large is your addressable market?
Startup Unit Economics
A good CEO/founder should breathe the financial health of the company (cash in the bank, customer pipeline, cost of customer acquisition and monthly burn etc.). Why? Because successful businesses make more than they burn, on a unit basis.
- What does the economics at a unit level look like now and at steady state?
- What the “rules of thumb” are for margins (gross, unit contribution, EBIDTA) for this sector?
- What are the key assumptions underlying your medium-term and steady state projections?
Series A/Subsequent Funding
Investors succeed when their investees grow and their valuation increases. Businesses can bootstrap for growth but high return businesses will need to raise external funding to execute on an accelerated growth path. Investors need to know:
- What are the top three metrics/goals required for you to get to the next round of capital raise?
- What key positions do you need to fill as you scale the business and to get to the next round of capital raise?
- What would your scaled unit economics look like?
Providing For A Healthy Exit
Venture capitalists have a fiduciary responsibility to their investors to provide them with the best financial returns. Hence, it is critical that startups have realistic theories of exit and can convince an investor of the following –
- What is your thinking on exits?
- Who could be potential acquirers for your business in India? Globally?
- Can you cite comparable examples?
Questions On Investability
Finally, raising money is never the end goal. It’s just another milestone. Learn more about investors you reach out to and partner with only those who not only bring money but also add strategic value to your business.
- How much capital have you raised to date? Who all are your investors?
- How far will the current funding get you? Has anyone else committed capital?
- How do you plan to utilise the funds?
Answering these 30 questions to the satisfaction of your investors and VCs will ensure that your startup continues to live one more day, fighting the funding war and inching closer to sustainability.