I’ll be speaking along with some VCs about startup funding this Saturday here in Los Angeles. Should be a good event.
It was a typical afternoon in Hollywood. Lunch with Rob Schneider at Xiomara restaurant on Melrose. We were meeting with his inventor, who claimed to have created a revolutionary machine to extract hydrogen from water – electrolysis. He said that he put in X amount of energy, and the machine generated 100X as output. I replied “Well, I’m just a French major, but doesn’t that run afoul of one of the laws of thermodynamics?”
He looked at me with a stunned expression. “No. Because the machine does it really fast.”
Now, I think I’ll write up this whole story in another article as it’s just friggin’ hilarious, but for now, the point I want to make is that I asked this inventor a patently obvious question, and not only did he not have a well-polished answer, he was clearly surprised to get the question itself. I was pretty sure he’d have said something like “It’s just so dang cute when liberal arts majors dip their toes in the science pool.” The meeting nosedived at that point.
Don’t let any question, much less obvious ones, catch you flat-footed when you’re grilled in a conference room on Sand Hill Road.
Yes, all investors are different, and you can’t predict what they will or won’t do. That said, there are some pretty common questions that you should be prepared to answer when you sit down with them. Or with key potential hires or Board members, for that matter.
Why did you start this company?
How long have you been in business?
Are you doing what you originally set out to do or have you pivoted?
Who are your competitors? How are you different?
What are your biggest risks?
I put these two together because they are the two areas where many entrepreneurs lose all credibility. (These and “Top Down” as we discuss in another article.) Too often, an entrepreneur will say something like “Well, what we have is so unique that we don’t have any competitors.” EVERYONE has a competitor. You’re just not thinking broadly enough. Let’s say you make a bluetooth LED light shower cap radio. Yes, there may not be an exact match coming out of Guangzhou. In this case, you’re selling a solution to a problem that may not exist. Who are your competitors? Bath items, novelties, electronic items, gifts. Pretty large field indeed.
And don’t pooh pooh your risk factors. Investors aren’t going to think “Wow, cool, no risks!” just because you say that. Rather, one big risk will jump out at them – you. List all the risks, candidly, you know damn well what they are. You can also list mitigation factors, but go easy on them. The more candid you are, the more confident you appear, and you also start to create the feeling for the investor that they’re already in the tent.
What are your three / five year projections?
When is your breakeven?
What’s your burn rate?
What’s your business model?
Have these all prepared, clear to understand, and be ready to discuss / defend them.
What round is this?
How much are you raising?
Who invested in prior rounds?
Who else have you talked to?
Use of proceeds
What’s your exit strategy?
I’ll just highlight how much you’re raising and if you’re talking to other investors. Ask for a precise amount, e.g. $500,000. Don’t give a range: $300,000 – $500,000. Haven’t you determined what the optimal amount is? Are you not confident that you can raise what you need?
And openly disclose who else you’re talking to. Investors are herd creatures, they go where others go. You want to seem like you have too many suitors, not too few.
Intellectual property / Barriers to entry
A bad team will drive a good idea into the ground. A good team will breathe air into a crappy idea. I can’t overemphasize the importance of a killer management team.
You’ll often be asked about your intellectual property portfolio, so be ready for it. But for my money, the only real barrier to entry for your competitors is your continual innovation. So after you rattle off that O’Melveny & Myers is doing your patent work for stock, follow it up with a nod to how you’re looking well past that already in your skunk works secret lab.
Oh sure, you’ll be asked more questions, and follow ons, but these are some of the most common, so be ready for them.
And no matter what question you’re asked, act as if you have been waiting for them to ask that very question. Smile. Then figure out what to say, but your very first reaction will also matter.
And if you don’t understand the question, perhaps it’s some complicated performance metric, or you don’t have the answer – be open about that too. Say “I’m sorry, I have no idea what the DAU-IRR-CLV-MPV-ROI Return Ratio is. But I promise that I will learn what it is, apply it to our company, and have an in depth analysis in your e-mail inbox by 6:15 am tomorrow morning.” Be honest that you don’t know, and in so doing, at least gain a little credibility. Investors don’t expect you to know everything already, that’s what they’re their for, but they do want you to figure out what you need to know, today. And I just like giving a precise time like that as it makes them wonder why that specific time, which gets you in their head, and it sets up a dynamic of a promise being kept.
Here’s an idea that I haven’t tried. What about an “Investor Pitch Meeting FAQ” sheet. Not your one page summary. But a more expansive document that raises the questions you expect, with your answers. That could be kind of fun. If you do it, let us know how it works!