Top 5 Key-Questions Venture Capital Firms Will Ask You
Many entrepreneurs look to secure venture capital in order to grow their business. As tempting and easy as it may sound, this path is not a walk in the park. Unless you are well informed and prepared.
Figures shown in a Harvard Business Review study show that in US only 1% of startups are financed by venture capital. So, why does that happen? Because it is not enough to have a smart idea, a few sales and be passionate about it. A strong business plan is needed, commitment and good knowledge of the market.
When you secure venture capital, you bring along a partner in your business. You might consider it like a marriage. So now you can understand why the VC firm will want to know the ins and outs of your business before making the investment.
Here are the top 5 factors that determine the investors’ decision to make the investment or refuse the startup looking for capital.
- Do you have a good management team?
You and your team have to tick several boxes. That means you need relevant domain experience, very good communication, high adaptability, you have to be engaged and cohesive.
It is higly adivsable to be honest about the abilities of your management team members and not hide the weak spots, but presents solutions on how you plan to improve them.
- Is the market you are aiming BIG?
It may sound simple, but let’s look further into this question. First and foremost, what does BIG mean? A market opportunity venture capital funds will consider proper is in excess of $1 billion. So, if you star small, with just a product or a local market, present how your business has the potential to scale. Consider answering questions like ”What is your adressable market?” and ”What share of that market do you intend to capture?”.
- Is your product or service original / unique?
Unique selling point – or the differetiating factor between similar products or services – can often decide the success or failure of a business.
Take into considerations several differentiators such as (1) having a completely new and original product that is also hard to copy by the competition, (2) finding a niche market to address to, (3) selling your product or service for a really good price.
These are only some of the differentiators you must take into consideration. At least one has to be part of your strategy. The more, the better.
- Is your startup a good fit for the VC firm?
Each venture capital fund chooses an investment philosophy. So, some may invest only intro social enterprises, others in IT businesses or green technology. Other may invest only in startups that help create future markets regardless of the niche they activate in.
Before contacting a VC firm, make sure you are in their area of interest, so you don’t waste time and get no results.
- How will you use the invested capital?
Be prepared to back your answer with metrics and timelines. You should have a solid plan, including the multiple aspects of a business (marketing costs, operational costs, administrative expenses, cash flow etcaetera) and burn rate – so the investor will know if and when you need a new round of capital.