Entrepreneurship Industry News

Fundraising 101: Deal Questions Asked During VC Interviews

Interview
This is the third part of a series on venture capital startup interview questions. We cover almost every question an investor will ask you when you are pitching to raise money, so you are totally prepared.

Unlike resources on the internet that just provide a few questions, this resource is unique as:

  • We provide the insight into what the questions actually mean (They can be sneaky).
  • Almost all the questions you will be asked, rather than just a few indicative ones.
  • Examples of what to actually say!

This instalment is on your fundraising deal questions. There is no way in hiding from these investor questions! You are guaranteed to be asked most of them. The tough thing is this area is not simple and you simply have to dedicate time to have a good answer. It’s only resources like this, or the alternative of learning the hard way that you will learn how to answer! Learning by failure is for dummies. If you read all of these and do your homework, you should be able to deal with every curveball thrown at you!

Fundraising Deal Questions
Question: How Much Are You Raising?
What They Mean

This is one of the most common and basic questions that every investor will ask you, even if they are not that interested. This is such a relevant question because it dictates whether or not the investor can even invest in you at all. You have the potential to look pretty stupid if you are pitching a seed stage investor who normally invests $500,000 and ask them to invest in your $20 million Series B round. This shows that you did not do any preparation to understand the investor; I’m surprised that you got a meeting in first place!

But let’s say you are looking to raise $1.5 million and the investor normally only invests $500,000. They now need to think if they have the capital or dry powder to be able to participate in this round. If they are normally a lead investor than their $500,000 may not make them a strong lead, so they may end up having to be a follower instead, which may not suit their business model and brand.

Once you answer this question, everything else can be linked back to it in some regards, so it acts like an anchor. The next question of course will be, if you are raising $1.5m, how are you going to spend the money? Your marketing plans, who you want to hire etc. is all linked to this very important number.
So fundamentally this question serves to see if you have done the most basic of preparation, and gives food for thought for the investor as a basic filter.

What You Need To Say

You need to have given this some serious thoughts. The amount you raise at this round need to be just enough to get you to your next round of funding, or even profitability (Especially if you are in Africa!). A VC-funded startup is a game of pass the parcel. Each round you raise large amounts from different investors, and the previous investor only cares about you living long enough for the next investor to buy into you.

“This is a great question, let me tell you how we thought about this. We want to have a runway of 18 months so that we have 12 months to execute with our heads down and six months to raise with some buffer. We are doing $100,000 MRR at present and the revenue milestone investors expect at series B is $300,000 MRR. According to our hiring and marketing plan, with our assumptions on CAC and customer retention, we need $2.5m for hiring and $3m for marketing. G&A should be around $1m on that hiring plan. Adding a buffer of $1m, our base plan is $7.5m. We have developed scenarios for a downside and upside case. We think we have a strong product market fit so we can comfortably raise $12 million and spend it properly with a good RoI. We are feeling out the markets with investors to understand what their appetite is and the kind of aggression they would like to commit to. We would love your thoughts?”

Question: What Will Be Your Use Of Capital? How Will You Spend It?
What They Mean

If an investor is going to give you money they very much care about how you’re going to spend it. Yes, you’re going to complain that investors think you have a crystal ball and can see into the future and become preoccupied with the exact number. Your numbers will be wrong, they will never be right. The key thing is that they can look stupid, and this is what you want to avoid.

Your financial model exists to show that there is logic as to how much you’re going to spend and where specifically and when. You add commentary as to why? Your financial model can be a very important. Read this for more.

Since you will never be sure how much exactly you should raise and how much you can raise, it is best to think of the upside and downside case for the amounts you can raise. I typically recommend that you go to investors asking for less than you actually want (the min you need) to make sure that you can actually raise the amount you asked for. You can often raise more than you asked once investors like what you’re doing and see the compelling logic of you growing foster by raising a larger amount. You therefore need be prepared for how you will spend that $500,000 you need and that million dollars you want.
In the 50Folds financial model templates there are some fantastic source and use charts to help you answer just this question.

What You Need To Say

“Let me tell what the key drivers are of our business. We deliver a fantastic product by hiring exceptional developers who are typically not the cheapest of people these days. The more features that we are able to integrate into our product, the larger the addressable market size. Our primary go to market strategy is via paid marketing, specifically SEM. We of course build in referrals to get earned customers, but we are going to scale through that channel. Our customer and revenue growth is therefore proportional to the amount that we allocate to marketing spend. As for any startup there are always trade-offs; should we be spending more on product, or should be spend more on marketing. There is no point in spending a lot on marketing if we don’t have a great product and there’s no point in having a great product if no one finds it! If you look at our sources and use chart you can see that we spend approximately 30% of funds on developers, 40% of funds on marketing and 30% on G&A. Our G&A base is relatively stable so we flex additional funds raised to marketing and product depending the raise.”

Question: Why Do You Want To Raise [$10m]?
What They Mean

Whilst this is a common-sense question, an investor can also ask it if they think you are raising too much or too little. As one founder blogged recently “in San Francisco they said we were raising too little, and in Canada they said we were raising too much!”

This question is quite similar to “how are you going to spend it”, but more directly you need to explain the specific logic as to how much you are raising. This question could be rephrased as “why do you want to raise $10 million? Why not five, why not 15?” You therefore need to ground this question into your specific plan from the financial model, the competitive dynamics of your industry and your traction to date. If you are more experienced and have a track record, you have more credibility to ask for larger amounts of money.

What You Need To Say

“We believe that the big data market is at a point of inflection. We don’t believe that first mover advantage is the best strategy since it involves a lot of market education, what makes more sense is to be a fast follower. Our key competitors are Google and Facebook who have both raised $25 million, whilst they have raise more than us, our product is very similar, but improving faster due to our extensible architecture, which has allowed us to secure more landmark customers since it is easier to integrate. They have spent a lot of their funds educating the market through marketing spend. We believe this is the perfect opportunity for us to raise a more meaningful round to firmly position ourselves as the leader in this industry.

According to our financial model we need between nine and $14 million to hit our key objectives. We are going to the market to raise $10 million since this is the minimum amount we need, and we can see if investors love our plan and want to commit more. This gives us a runway around 20 months unless we are more aggressive. I would be happy to take you through the key assumptions in the model.”

Aka…

Question: What Are Your Milestones For The Next Round?
What They Mean

Unless this is your final round of investment before you go to IPO, there is always another investment round. The next round of investors will want to see that you achieve key milestones which adhere to their heuristics and market benchmarks. Of course, you are building a business to make customers happy but you’re also building a business which is attractive to investors. The danger is you act like Beepi and focus too much on investors.

The earlier the stage of your startup the more your focus on milestones will be thesis based, essentially in/validating something. This may be illustrating that you can ship your MVP, basic product market fit, come up with basic metrics such as your acquisition costs through certain channels etc.

Later stages such as Series A and Series B are much more about the numbers. Your milestones therefore become much more financial, such as the growth rate your revenue, the number of customers, demonstrating cohort based retention etc. The milestones therefore are a function of both qualitative and quantitative integers rather than strings (story telling) the larger you are. Do not have too many, you need to be focused. Being unfocused is never a good thing, unless you are a competitor.

What You Need To Say

“Our milestones are a combination of qualitative and quantitative figures. Let me first start with the qualitative ones. Internally our KPIs are the following: ACSOI (cough, Groupon), MRR, MRR Churn and MRR growth. These are the things that we track daily, weekly, monthly, as well as through cohorts. Through discussions with investors we understand for series B they want to see us with a MRR of $1 million and a growth rate of approximately 40% month-on-month. Naturally it’s easier to get the MRR numbers if we have a low churn; we target under 2% monthly. Our qualitative milestones in 12 months time following the closing of the round are therefore $1.2 million MRR and an average three month training growth rate of 30% month on month. Qualitatively, it’s critical for us to be competitive that we are able to close deals with Yahoo, Microsoft and Facebook. For us to be a compelling investment proposition at series B we need these deals done. Part of our funding is to hire three people in our business development team who we already have lined up, waiting to join to get us there. Do you agree that these make sense?”

Question: Why Are You Raising Now?
What They Mean

Investors love it when you don’t need to raise it all. They want to give you money when you don’t want it, of course you want the money when you need it. In asking this question they’re trying to figure out if there are any skeletons in the closet or not? Are you about to run out of money?
Alternatively, perhaps you are about to reach point of inflection and you’re raising money for you to be able to capitalise on that? This is a compelling reason for investors to invest. You may also want to add that the timing is perfect in the market for you to raise.

What You Need To Say

“Artificial intelligence has finally come out of a cold winter. It’s currently the top of the agenda of the executives at every single company. Through the relentless commentary of the media and even the White House putting out a position paper, the market is finally educated. We think this is the perfect time to aggressively penetrate the market. We have spent the past two years developing our product to be one of the real leaders in the industry, and frankly it’s beautiful, but that’s just my opinion! We want to share our amazing product with customers and that costs money. We have been funding the company out of our own resources and due to the sales cycle, for us to more aggressively and land grab customers we need to spend money on marketing. We know that you had a fantastic experience working at Google Brian and so we want to come and talk to you first, to see if you would partner with us on this journey!”

Question: What Is Your Runway?
What They Mean

The investor is asking are you about to run out of money! They are trying to figure out who has the negotiating leverage. Unless you have a lot of alternatives, meaning competitive pressure for the deal (a hot deal) the investor could even be sneaky, let you run out of runway and then offer you money on worse terms because you have no alternative. This actually happens.
They’re also trying to understand how fast you need to move on this deal. If you have a lot of runway, then you as the founder have a lot more negotiating leverage. As we said before, investors want to give you money when you don’t need it. Slack raised a lot of money when they didn’t need it, so they wouldn’t have to raise when they did. They got good terms, so why not? If you have 12 months of runway and you’re talking to investors about raising more, this is quite compelling. Perhaps you want to raise the money because traction is going so well that it makes sense to triple down on what you’re doing.

What You Need To Say

“We closed our round four months ago. I know you were a founder before, so you get how much fun fundraising is! We still have 14 months of runway our current burn rate. The market is adopting our product far faster than we had anticipated. We have identified scalable marketing channels and our on-boarding is automating flawlessly. We’re talking to the market since if we can get strong terms, it makes sense for us to triple down on what we are doing. We have no need to close a round, but if the right partner sees the opportunity as we do, we think this is a perfect time to more aggressively penetrate the market.”

Question: What Will Your Runway Be For This Round?
What They Mean

This is a funny question to founders who don’t quite understand the implications. If you have a strong business fundamentally, and you tell investors you’re raising money for 24 months, then they are going to think and then probably say that you are not spending money fast enough and being aggressive in pursuing growth. If you say that you’re raising money for 12 months, they will either think you are ignorant, since it takes a long time to raise money, and you will be back out fundraising in a matter of months, or that you are growing so fast that you just need to validate a few things before you raise a considerably larger round and therefore this could be viewed as a bridge round.

Typically, the best answer on average is 18 months. This gives you 12 months execute and six months to fund raise.

What You Need To Say

“Our base plan is 18 months. That obviously gives us 12 months to execute and six months to raise. We still need to validate our scalability through the affiliate channel. If we are able to generate converting leads at $15, then our CAC works very well with our assumed LTV, and we should more aggressively scale this marketing channel. Talking with the head of marketing, we might drive an additional $500K through this channel, which would reduce our runway by three months. The theory being that we could go to market and raise a larger round given our high-growth rates. Do you agree?”

Question: When Do You Want To Raise Next?
What They Mean

This is very similar to the question about how long is your runway. It also implies that you are going to raise next, and the next question that will come is how much do you plan on raising then. This is an opportunity for you to talk about how you think about the growth trajectory of your business and your fundraising strategy. How answer this question will depend on the exact circumstances of the company and why you’re raising at the moment.

What You Need To Say

“As you know we are raising a bridge round of $1.6 million. We achieved a lot since our series-A but due to the issues with replacing our CTO, our product fell behind schedule. We were fortunate to find Jim, who left from Expedia to us and has us firmly on track again. Our metrics are not quite in alignment with what series B investors are looking for, but the great thing is we only need four months for us get there at the current trajectory. Assuming we can close this round by the end of the month, I will start talks with future investors in two months’ time. Assuming that’ll take us five months to close the round, and at our current run rate, this $1.6 million will last seven months. Our CFO, Mary, has already plans to extend our runway three months assuming that conversations don’t go as quickly as planned.”

Question: How Much More Money Do You Plan On Raising?
What They Mean

The investor is considering how much dilution they are going to have before exit, but they’re also thinking how to allocate dry powder, if they want to participate in future rounds. Investors have targeted ownership percentages in the company that they investing in. Since most startups fail, they have to have a large enough position in the successful companies to make their business model work. If you have raised $10 million dollars to date and you plan on raising $70 million, in total, that is an additional $60 million across maybe 3 rounds. They will have to do math to figure out how much they will need to commit to maintain their targeted position.

This question also is a test to see whether the founders have considered their execution strategy and the type of business and scale that they want to build. If you say that you want to raise $5 million more and you have only just done a seed round then they might wonder if they have found the least capital-intensive business in the world, or the most naive founders.

What You Need To Say

“We are an enterprise SaaS startup. Historically, it takes seven years and $70 million to get to IPO. We are quite similar to Box in some regards given our customer focus and product complexity. According to CrunchBase they’ve raised $85 million, so that is probably a good benchmark for us.”

Question: How Much Do You Want To Raise At Your Next Round?
What They Mean

If you get to the point that investors are asking questions like this, they are more out of genuine interest than of a sneaky nature. Your answer informs them as to the scale business you want to build and whether they are able to participate in the next round. It is also insightful as to how aggressive you are.

What You Need To Say

“We like to take things one day at a time. Clearly this Series A is a large milestone for us and we have a lot of work to get down to for us to scale up as planned. We have set out our milestones for the next round and our target is to be at $12 million ARR. Assuming we hit that, it should be quite reasonable for us to raise $30 million, assuming that the investment environment does not change. This is similar to the raises we have seen our competitors raise at this stage of business.”

Question: Who Is Your Ideal Investor?
What They Mean

They are actually asking why you’re pitching them specifically, and if your description does not match the person you’re currently talking to, then why are you in the meeting room! You want to craft this answer to be different depending on to whom you’re talking to. Investors like to feel special. Deep down they know they are check-book, but they want to feel that their existence means something more AKA they can provide value add. Founders need to appeal to their egos to get their wallet. This is best done by doing some research into the person’s background so you know how to sell to them.

What You Need To Say

“We want to develop a relationship with an investor who can stay with us through the next three rounds. The reality is that taking investment from VCs is more like a marriage, so the size of fund of investor is important. We also want to have people on our board who are going to be able to be fantastic sparring partners to challenge us. There really are not many investors around who get enterprise SaaS. So, the reality John, is you are founder yourself and bootstrapped an incredible enterprise SaaS startup yourself. You get the struggle. Khaki Capital just closed a $700m fund so we are perfect for the stage of your new fund life.”

Question: Are You Raising At The Moment?
What They Mean
At a basic level the investor is asking if you are wasting their time or not. If you say that you aren’t raising right now, then they are wondering why they are in the meeting. You as the founder therefore need to let them know if you’re not raising right now that you will be and are looking to build relationships with investors to figure out whom you want to deal with in future.

Alternatively, perhaps you requested an information meeting with the investor and therefore they’re asking this question to see if they pre-emptively can get in on the deal without a lot of competition. You need to think carefully about why you are talking to investors and give an appropriate answer as to whether or not you are raising. Of course, the next question will be how long have you been raising for…

What You Need To Say

Are you raising or not? It’s a simple question unless you have particular reasons why you want to give a misleading answer.
“Yes. A lot of things are going right and since we got that article published in TechCrunch; a lot of analysts have been spamming us. We spoke to a couple of investors who did inbound and so there was demand to invest in us, so we are going full on in the process, starting this week. Well with you actually!”

Question: Who Else Are You Talking To?
What They Mean

Depending on how you answer this question, it can imply that you have been trying to fund raise for some time, are not discriminate in whom you are trying to raise money from, or provide insight into who the potential competition are. The best thing for you to do is to provide as little information specifically as possible, whilst still intimating that there is FOMO to be had.
Never mention the specific investors that you’re talking to. Investors know other investors far better than you do. They can easily call them up and check everything that you said as well as even potentially collude. There just isn’t any upside for you as the founder to name names. The best thing to do is say we are talking to firms of a calibre similar to yours, as well as the principal sides of telco companies etc.

What You Need To Say

“We have only been fundraising for one week, however we have already got quite a lot of interest from three of the big VCs who do SaaS. We are under no pressure to raise right now so we can afford to be picky. Our ideal investor has a large fund size and experience and focus in SaaS, so those are the people who we are talking to. I’m sure you can guess who they are.”

Question: When Are You Looking To Close?
What They Mean

The real reason investors are asking this question is to understand how fast they need to move. Are they late or early in the fundraising process? If you’re looking to close in three weeks, as you have been raising for two months, and only just got the introduction to Khaki Capital, then they may be concerned that they may not be able to move fast enough to close the deal. Alternatively, maybe you just started raising and are therefore under no time pressure, in which case you can just say “we just started raising so maybe four months?”. There may also be a scenario where you’re running out of money so closing this is a necessity. It’s best not to show desperation here, as you lose negotiating leverage.

What You Need To Say

“We are in the middle of our fundraising process so you are little bit behind. Fortunately we have taken the time to create a proper data room (Note: use this check list!), have a model done and various material that other investors have asked from us. This should help you get up to speed quite rapidly. How long does it take you to typically get a deal done? We would of course love to work with you, so would like to have you in the process.”

Question: Why Do You Want To Raise From Us, Specifically?
What They Mean

Investors want to feel special and that there is a reason why you want to raise from them and no other people. It’s quite like dating that way. “You have legs is a bad response” as is “because I hear you write checks easily!” The best answer is of course not about the money; it’s the quality of the partners, the brand reputation of the firm, the fact they do follow-on investments and all the value add that they offer. You need to be specific for each firm that asks this needy question, but you can tell them the same sweet nothings

What You Need To Say

“Khaki Capital is the leader in SaaS. You guys have done some fantastic deals from Slack to Box and Asana. The best founders choose you. You yourself, David, write the most fantastic blog and we have been following it for the past few years. Our metrics dashboard is based on your template. Of course, we want to raise from Khaki Capital, but the reality is we take money from a specific partner and you are the partner that we want the most!”

Question: What Value, Besides Capital, Would You Hope To See Our Firm Provide Your Startup?
What They Mean

This is a different variation of the question we just went through. The investor is basically wondering whether or not the founder has considered fit or are they pitching blindly to anyone with a check book? Of course, they’re fishing for a complement too (needy bastards).
What You Need To Say

“Look David, we think we have a compelling value proposition in our startup, so capital is a commodity to us. There’re lots of investors who are expressing strong interest to proceed. We are in a fortunate position to have choice. We know that at the end the day, it is us the team that are going to execute and make things happen, but a great investor can help make more good things happen when they have something fantastic to sell. Having been in the industry for so long, you have the most amazing Rolodex. You have also seen many companies succeed and fail and have perspective that we don’t. We like your opinionated views on things. With you on our board, we think great things can happen.”

Question: There May Be Conflict With One Of Our Portfolio Companies, Are You Happy To Talk To Us?
What They Mean

Did you not actually check who the portfolio companies are of the investors and that your direct competitor is a portfolio company? To be honest most investors will not take a meeting with startups if they know that they have invested in a competing company. Where there is a grey a grey area, they will normally say upfront “look we invested in Facebook and there may be some conflict in your advertising plans. Are you still happy to chat with us or shall we end things now?” Dodgy investors would not say this. In some sense the investors are covering their ass/reputation.

What You Need To Say

“Yes David, we know that you’re invested in Facebook and we have seen that they have been expanding in advertising. The great thing is we are approaching things very differently to how they are. In fact, Facebook is a potential exit opportunity for us, and given the relationship that you have with Mark, this could work out very well for all of us. Of course, we would want to manage conflict of interest, but there are ways around everything. Do you want to proceed?”

Question: What Are Your Deal Expectations?
What They Mean

This is an indirect way of asking what your valuation is and are you crazy or not? The entry price and the terms matter for investors to generate an ROI. Information is power. If you say a lower number than the investor was expecting then, this is super news for them. If you pull out a crazy number, then this could actually be a conversation killer, so you have to be careful.

Never give a specific number, instead give a range, and add that you’re feeling out what the appetite is in the market. If you have the data, it can also be good to refer to benchmarks so that you show that you know where the market stands.

What You Need To Say

“These are in line with market. Talking to some of my friends who have raised recently at series a, they have all secured a raise in a pretty normal range and at standard terms, meaning no 3X participating preferred liquidation preferences, haha. Of course, terms matter for us, not just the valuation. We don’t want to have to high a valuation that we can’t grow into and cause problems at our next round. Given our traction and benchmarks we think a range between $9 and $12 million is market. For our lead, we expect to give them standard information rights, a board seat, as well as a standard liquidation preference. It’s too early to start getting into other nitty-gritty. Would these be in the ballpark of what you are expecting?”

Question: What Is Your Valuation At The Last Round?
What They Mean

This is a straight up question that you can answer directly. The only thing that you need to bear in mind is if they are obviously peculiar things happening. For example, if you’re l round was $1 million and you are raising at a pre-of $20 million, then that is a 20X increase. Does your traction and change of circumstances justify such an increase? You will have to be prepared to answer this. On the other hand, if you raised at $5 million Pre before and are raising at $6m now, then something has been going wrong, right?

What You Need To Say

“$5m pre. We raised $2 million, so $7 million post. That was 12 months ago. We are raising $10 million now.”

Question: What Are Your Valuation Expectations?
What They Mean

This is a very similar question to the previous one “what are your deal expectations?” but focused directly on your valuation.
Determining your valuation is difficult because there is no right answer. You have to be both realistic on the upside without scaring investors off, but on the other hand, you do not want to undervalue your company, leaving money on the table, as well as the VC thinking something is wrong.
The best way to handle this question, like others, is to do all you can to have several VCs interested in you ;). If they know there is demand in the market then the investors are the ones who are price takers. You can afford to be a little more arrogant in responding to this question if you know you have a lot of options. If on the other hand, you don’t have a lot of options, you need to be quite careful.

What You Need To Say

“This is not a private equity deal. You can’t do a DCF on a startup. All you can do is compare traction with other companies having raised in the market, to understand what the market rate is, and pricing happens from investor offers. Who we raise from matters to us so we would prefer to have the right investor rather slightly better valuation, of course both would be lovely! We think our valuation will be in-line with other deals that have been done in the previous two months, which I’m sure you’re aware of.”

Question: What Are The Terms Of The Deal?
What They Mean

The investor is trying to get information out of you as usual. Unless you are in advanced discussions and have received multiple term sheets, it’s probably best not to get into too many specifics, particularly if you don’t understand term sheets very well. You have been asked this question specifically so you will have to respond. If you respond with something like “market” then you’re in inviting a follow-up question of “can you be more specific please.” I would treat this with a high-level response whilst still being slightly vague, and deferring to the investor to offer their terms.

What You Need To Say

“Terms of course matter to us, arguably more than the valuation. We appreciate that you as an investor well want to have certain terms to protect you as a minority shareholder, and we completely understand that. We are not going to accept things which are not market such as full ratchets. We are expecting pretty standard terms. I would like to know how you are typically structuring your deals?”

Question: Do You Have A Lead?
What They Mean

Finding a lead is the most important thing that a founder has to do in getting a round done. There are less leads than one would think. Most investors are followers. This means they won’t do anything until you have found lead. It’s best to always ask investors if they lead rounds, or not?
If the person you’re talking to is the follower, that means they can’t move on this until you have found a lead. If that investor is a lead, then they are wondering if they have competition.

What You Need To Say

“We know that finding a lead is the most important thing and is therefore our focus. We understand that you frequently lead rounds and this is why we are talking to you as one of our first meetings. From what you understand so far, would you be interested in being the lead?”

Question: How Much Do You Have Committed So Far?
What They Mean

This question is more likely to be asked by Angel investors or small investors who are followers. Most investors don’t have a clue what they’re doing, so they use signals instead. If smarter and better known investors are interested in the deal then maybe this is something they want to jump on. People always assume others know something that they don’t (which is super dangerous!). If you have only been raising for two weeks and you have half your round filled, then it looks like this deal can happen and people should pay attention. Success breeds success.

What You Need To Say

“We are raising $2 million and we have $700,000 already soft committed. They are large checks from angel investors who are waiting for lead. This is why we are talking to you. We understand that you typically write checks for around $1 million so that should be in your sweet spot.”

Question: How Long Have You Been Raising?
What They Mean

Investors don’t actually care how long have been raising for, per se! This question is trying to figure out if you are a winner or loser. Your fund raise has a shelf life like bread getting stale. If you have been raising for four months and not getting a bite, then this is a loser. If you have been raising for one day then all bets are off. People talk so this is hard to lie.

What You Need To Say

“We started our process two weeks ago. Our first meetings were just to get our footings and now we are talking to the big boys like you, ha ha.”

Question: Have You Thought About Raising Venture Debt?
What They Mean

Venture debt is a lesser known vehicle for raising funds. It’s basically debt but available for startups. It’s only available around Series A when you have been generating revenue that the venture debt funds will look at you though. The truth is the main criteria for VDs to invest is the quality of the investor who is leading your round. Venture debt investors do not want to lose money, so the theory is if you have a great investor they will not let you die (which is not true). If you are a seed stage company then this is a pretty stupid question. If you are at series B and you have not mentioned that you are raising venture debt then it’s a great learning opportunity. It could also imply that the investor is starting to think about how to put the round together and that’s a positive sign.

What You Need To Say

“I’m sorry I don’t know that much about venture debt. I can remember reading about someone getting some in Pando, but I didn’t really pay attention. I presume it is like debt but for startups? We are open to anything that would optimise our capital structure. Is this something that you could explain to me or facilitate some introductions?”
Alternatively. “Yes, we are talking to three firms already. They’re waiting for a term sheet before they proceed to DD as usual.”

Question: Who Are Your Investors?
What they mean

Assuming this investor does not know you very well, then this is a good way for them to qualify whether or not you are good company. If you got great investors in your previous round then you must be okay. It’s country club rules. Investors also like to invest with people that they know and like. So, if your investors are friends with this investor, then David gets to call up John and have a chinwag about internal information. Of course, John will probably lie a little and give a rosier picture to David… Investors want to make money right You should just be straight up, in short.

What You Need To Say

“Index led our around. We also raised money from some great entrepreneurs in the valley through my contacts in Google. Index are of course interested in participating in the round, but we want to make sure we get market rates”

Question: Are Your Existing Investors Investing In This Round?
What They Mean

Investors look for signals, both good and bad. Investors doing the pro rata is a neutral signal. Investors doing super pro rata is a positive signal. Investors doing no pro rata is a potential deal killer, unless there are specific reasons. It’s okay for angel investors not to do a pro rata because they don’t have any more money and this is a large around. If your lead investor is known to have money and they are not following on then this is really bad. Investors always assume that investors have the inside track and if they are not investing, then something must be wrong, and that you the founder are not telling them something. Before you start raising you have to discuss the fund raise with your investors and know whether or not they are going to invest. If they are not going to invest then you have to make sure that there is a good reason, and that you both tell the same story, otherwise your investor is fucking you. This is the worst possible thing to happen.

What You Need To Say

“Yes, all our investors other than some of the less rich angels will be doing the pro rata. Our lead investor, Index, has too much capital tied up in the on-demand industry and their limited partners do not want them allocating any more capital to it.”

Question: What Are Your Investors Pro-Rata Rights?
What They Mean

This can be a good or bad question. It is a bad question if your investors have pro rata rights and are not using them. It is a good question if your company is doing very well and the investor is getting greedy and wants the whole round for themselves. They are starting to think how can they block the investors from getting the pro rata… Yes this happens (And quote often to a fund you have heard of).

What You Need To Say

“Yes, we have agreed to pretty standard terms. However, if you are looking to do the whole round yourself, I’m pretty sure some of our investors would be happy to take money off the table since we have grown quite considerably, and on paper they have already multiplied their investment. I can of course introduce you to them to have those discussions.”

Question: Why Isn’t Your Existing Lead Leading This Round?
What they mean
They Mean
You have to have a really good answer to this question. Do not respond “I didn’t ask yet.” The default thinking of an investor is something is rotten in the state of startup. So, if you do not answer this properly, you may not be raising from this investor or any other. Make sure that whatever you tell the investor, that you agree with your previous one to say the same thing. Not having any more capital is typically the best answer in the absence of others.

What You Need To Say

“Quest are seed investors, they are happy to do pro rata, but it is not their investment strategy to do Series A. Pretty clean cut.”

Question: Do You Have Convertible Notes? What Are The Terms?
What They Mean

There is typically nothing sneaky about this question. If they are asking it, it means they are ticking off the mental boxes before maybe pulling the trigger on the deal. This is typically not a question to be asked in the first meeting. It is not commonly known by founders, but once you agree to terms in deals, they become a watermark for future investors. If you were stupid enough, or desperate enough to have to accept a 2x liquidation preference, then future investors will want the same or more. They will use the terms against you.
What You Need To Say

“Yes, our seed round was done as a $2 million convertible note converting at the next qualified financing round, which would be the series-A we are discussing now. The terms are pretty standard, but for headlines, there is a 20% discount and $6 million cap. We also negotiated to mitigate phantom preferences (Read this!)”

Question: Do You Have Any Government Grants?
What They Mean

This is a pretty bland question. In the UK, perhaps it is about use of EIS, in Australia it is about developer grants, and in Singapore there are all sorts of benefits. There is not that much that can go wrong unless there are obvious benefits in your country and you are too stupid to use them.

What You Need To Say

“Yes, the Singapore government is very supportive. EDB see the potential in everything that we do and have granted us a fifty percent benefit on salary on the hiring of up to twelve developers; that is a value of $500,000 over two years.”

Question: Did You Think About Crowdfunding?

What They Mean

This is only really relevant for hardware startups, and in some cases, consumer-focussed startups since challenger banks in the UK have used them to good effect. It can also be a stupid question on behalf of investors. It’s typically always a bad idea to call investors stupid. Unless your name is Mark and you were goaded to go in to the meeting in your dressing gown to tell them to screw themselves. Then adding they are stupid, poo-poo pants is pretty fine.

What You Need To Say

“We don’t seek crowdfunding as being terribly applicable to us. We know some consumer businesses have got a great acquisition cost of customers from there, but we just don’t see any demographic crossover. We thought about it, but it is not something we would proceed with. Do you have views we might not have thought of?”

Question: Have You Thought About Going To An Accelerator?
What They Mean

This may be a naïve question, or it could also be implying that you are not ready to fund raise. If it is the latter, you will find out quite soon that the investor is going to take a pass, but they are still interested in what you’re doing; you just don’t have the traction that they need to be comfortable yet. If you are early stage, then the best answer is to say that the good accelerators reached out to you to join them, but you don’t see the value in joining a program. You are clear on what you need to execute on, and you need the money to do that. You could also be bad ass and say you mentor at the accelerators they were recommending.

What You Need To Say

“I have friends who went through Y-Com and 500s, and they have very positive things to say about them. Firstly, we are out of cycle, they started in June, and our team is a little bit more seasoned than the typical founder who goes into these programs. Rather than support, we need the money to execute on the plans we have set out in detail.”

Question: If You Knew With 100% Certainty That You Weren’t Going To Be Able To Raise (More) Funding, What Would You Do?
What They Mean
This is a curveball. It’s trying to figure out how well you know your business and how you respond under pressure. In order for you to answer this well, you will have to have to have understood the upside and downside scenarios in addition to the base one you are proposing. It is also a test to see if you are cockroach that just won’t die, and will stick with the business until it is successful! Yes, being called a cockroach is apparently a good thing these days. The best founders are creative, and creativity comes out of constraints. If more money is no longer available, which in 2016, it often wasn’t, then are you the one on the mat knocked out, or the one holding the arm of the referee?

What You Need To Say

“That’s a really interesting question Fred! Would you mind giving me a moment to think? Okay, at present our payback on customers is relatively short, we are raising to invest more substantially into marketing and the infrastructure of the organisation to be able to support that. The core value proposition of our product appeals to one segment in a venn diagram, and the new money is also to fill that out to increase our addressable market. The first thing we would do is bring down our marketing expense and make the necessary cuts to headcount in the S&M department. Since we would not be scaling, we could also afford to cut some of our COGS account, meaning savings in our hosting, customer service etc. Because of that, our G&A would partially go down too. We have scaled up our developer team on the assumption of building out to enterprise customers; I would refocus the company strategically at the mid portion of the SME market and seek to build out our dominance there. This would not help us achieve our vision, but we would become a fairly profitable business. We could probably flip it for around $75m”

Question: If You Knew With 100% Certainty That You Were To Raise Sgnificantly More Funding, What Would You Do?
What They Mean
This is the flip off the question we just went through. They are just testing to see how you would build a substantially size business a lot faster than you had originally presented to investors. A smart team will have thought about the downside, the base, as well as the upside scenarios. This could be a great moment you to say…

What You Need To Say

“Thanks for asking that; we were hoping you would. We have already mapped out a plan!”

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