Entrepreneurs

Evaluating Early-Stage Startup Potential: 33 Key Questions Investors Ask

Startup investors pride themselves on being good judges of potential. Betting on what founders can become and build. Hoping that their investment will unlock some of that future growth.

At the earliest stages in a startup’s life, when there’s often not enough data to extrapolate from, investors need to master the art of asking the right questions and knowing what to look out for in founders’ answers. 

If you’re a founder looking to raise capital for your early-stage startup, here is a collection of questions to consider before approaching investors.

What is the founding team’s background and how did you come together to work on this specific startup idea? 

Investors want to understand your team’s experience, expertise and track record – all in an attempt to predict your capability to deliver what you’re setting up to do.

While having a highly relevant background for your startup can build your credibility with investors faster, direct experience in the industry is not a prerequisite. Some investors even argue that there’s higher potential in having a fresh, preconception-free perspective, a beginner’s mind ready to question everything and learn fast – particularly when operating outside highly regulated or technical industries. 

Often, investors want to understand which decisions and key turning points in your life led you to becoming a founder. We invest in people with ideas and so really want to make sure we understand the founders as people and where their motivation comes from. We often invest in teams that might not be a ‘typical’ founding team on paper but where we identify a certain ‘alpha’ and then like to be contrarian in our investment decision,” shares Sebastian Pollok, Founding Partner of Visionaries Club.

Investors will often look to assess compatibility and complementarity within the team, as well as enquire about your history of working together.

Why do you think you are the right team to build this startup?  What’s your unique insight or special skill set that will make you the winning team within this category?

“There are always signals in what founders have done in their past that act as a true indicator for their ability to sell, build and execute through team building, product building and company building. This could be relevant work experience, side projects, contribution to relevant open source projects, progressing rapidly in a previous company and so on,” explains Emma Phillips, Investment Partner at LocalGlobe. “The why question helps to test what it is that gives this team the unique insight and perspective on the problem.”  

Investors might also test your understanding of what it takes to win in your chosen market category as Phillips also stresses: “We all want to back the category leader, and you want to back founders that have taken time to think through not just how to build a good business, but how to build an exceptional one. You want to see that drive and hunger from day one.”

How do you resolve disagreements between the founders? If you and your cofounder(s) part ways in the next year, what would be the most likely reason?

“We look for founding teams that demonstrate strong cohesion whilst being able to challenge each other constructively. Asking them about potential reasons for breaking up (even if unlikely) can often shine a light on topics where cofounders don’t see eye to eye,” expands Lina Wenner, Associate Partner at Firstminute capital.

Investors might also look at the equity distribution across founders and if there’s an imbalance there that might impact the team dynamics and cause conflict in the future. 

What are the key positions you want to hire for next? How are you thinking about attracting the best talent and developing your team?

It’s important that the founders acknowledge their strengths and weaknesses, and know who they need in their team to fill the gaps. It’s then their ability to attract top talent that increases investors’ confidence.

Pollok shares why he likes asking these questions: “It lends itself to a constructive discussion around the current team setup and future hiring needs, which in itself might give interesting new insights into how founders think about their company and their people.” 

We want to see that the bar for hiring is really high, and the founder is capable of attracting best-in-class talent, as this tends to be a good predictor of success, particularly if the company has not yet found product-market-fit,” adds Wenner.

How do you typically make tough decisions and what are some of the heuristics and mental models you employ? How do you develop yourself as a founder?

“Being a founder is all about making the decisions that no one else dares to make. Navigating the unknown and building a company from nothing requires lots of mental stamina and a conscious approach to making decisions and learning from past mistakes. We like to understand how founders think to see if they are up for the challenge,” says Pollok.

Triin Linamagi, Co-Founder of Sie Ventures, has a similar approach: “I like understanding how creative the founders are. When things get tough, can they turn the situation around, and do they have enough resilience to keep on pushing even in the most difficult situations.” 

Investors often like to back founders who can demonstrate grit, a growth mindset and a relentless curiosity that fuels iteration and improvement.  

What is your vision for this company? How do you define success? What really drives you?

“This gives us a glimpse into the ambition level of the founders and the larger vision they have for the company and themselves,” explains Pollok. “Do they really want to make a ‘dent in the universe’? Then we’re on board. Do they just want to get rich quickly? Then we’re probably not the right partner.” 

Phillips shares the sentiment: “We want to help the most ambitious founders build a huge global business, and we want to understand what that looks like through their eyes. My favourite founders are mission-driven, and you can imagine them still building a company in this sector in 10 years time.”

These questions are also very relevant for science-based ventures as Devika Thapar, Co-founder of Wilbe details: “We take a scientist-first approach to understand the entrepreneurial ambitions of the talent behind the research before looking at the market opportunity and science itself. It’s hard to assess this in one-off questions and usually takes a period of exploration together with the founder(s) to understand aspects such as: what is your vision for the research? For the company? What role do you see yourself playing in the journey? And what do you think you need in order to get to the next inflection point? This provides a lot of insight into how the researchers are thinking about the shift from scientist to entrepreneur and how they prioritise activities.” 

A big vision can also inspire new hires, customers, partners and, to a certain extent, even future investors.  

What market are you going after? How big is it and how big can it become? 

Founders should be ready to articulate what the problem is they’re looking to solve, how many people/businesses have it and how much they are paying or willing to pay for a solution. 

Investors want to understand both the niche you might start with and the overall potential of the opportunity in the future i.e. how big could your company get if you succeed in disrupting or creating this market. 

“I would like to see some top-down and bottom-up analysis on market size rather than answers like this is a huge market and growing x%/year. Also, it is good to understand market segmentation and size by your customer persona,” shares Deepali Nangia, Venture Partner at Speedinvest and UKBAA Angel Investor of the Year (2021).

Nangia adds the caveat: “Market sizing is very hard when it comes to truly new innovations which has been the case for so many things we see nowadays. So while I do ask a lot of these questions – there might be no right answers but I just want to understand if the entrepreneurs have thought about it.”

Why is now a good time for your startup to enter the market?  If others have tried in the past and failed, how is your approach different and what is true/possible today that wasn’t yesterday? 

Being first to market doesn’t matter as much as being the closest to an inflection point that generates a new wave of potential. This can be linked to a wide range of factors,  from new enabling technologies and regulatory changes to a switch in consumer behaviour and market trends.

“It very often comes down to the timing  – why is it the right time to build the business? What has triggered the need? I would not like to invest in a business that could have existed 5-10 years ago, I’d like to understand what has triggered the innovation in this particular sector and why,” says Linamagi.

Investors see a lot of startups and it’s not unusual for them to be very familiar with startups in your space that have previously failed. It’s impactful if you can articulate how the market conditions are different now and how you’re tackling some of the other issues that might have affected those startups. 

What is the competitive landscape like? What are your potential customers using now to solve the problem or address their needs ? 

Investors expect founders to have an in-depth understanding of their chosen market and of their company’s role within that ecosystem. This includes market composition and dynamics. For example, who are the major players in your industry and key direct and indirect competitors? How fragmented or consolidated is the market? How prohibitive are the switching costs for the customers?

What is your core product and value proposition ? What differentiates it from the competition and how defensible is it? 

Investors want to understand the nature of your product. Does it have the potential to unleash change or is it mostly advancing an incremental benefit? Are you looking to address customer pain points or to unlock new opportunities? How are you thinking about your product roadmap?

If you want to disrupt a large existing market, your strategy will probably involve creating superior products along at least one dimension that matters to customers and thus winning market share or further expanding the market by, for example, reducing cost and increasing access. If you’re looking to create a new market, you need to be mindful of the burden of educating customers.  

Think about what is different in your approach and how difficult will it be for other companies to catch-up with you – what advantage can you leverage to stay ahead of the competition e.g. technology, network effects, brand, access to data, exclusive strategic partnerships.

Who are your customers and how have you validated their need and appetite for your product? 

Investors want to see that you’ve immersed yourself in the market and went beyond the macro-level figures to  ‘zoom in’ on customer personas. After all, markets are collections of individuals/businesses with their own motivations and desires. Pointing to specific customers who love your product and mentioning quantifiable benefits of using it can give investors a boost of confidence in your ability to find or further expand the product-market fit. 

“I think that often entrepreneurs don’t think deeply enough about their customer persona and the problem. The pitch definitely needs to reflect that research, customer development and thought to the extent that people can describe their customer persona in detail. I think the more that you can articulate that the better because it really shows that you really understand who you’re selling to, why they buy, why there’s even an opportunity there. I think that often people just talk about problems at a perfunctory level and think about demographics as very broad without really delving into the nitty gritty of the customer persona. That’s where I would spend a lot of time,” shares Elizabeth Yin, General Partner at Hustle Fund. 

Nangia adds: “I always ask if they have tested the product with the consumer. I often find that people build products/solutions as a result of their own pain points, however this pain point has not been validated enough with users/consumers  before they start building it. ‘Build it and they will come’ is usually not true. ‘Build it with them, test it with them, iterate it with them and they will come’, perhaps. I also ask if they have tested pricing and willingness to pay – something that can be tested easily with landing pages – and most often this is not done.” 

What is your traction to date? How are you enabling your customers to find your product? How are you or will you generate revenue? 

Building something potential customers want is mandatory. But, if you’re looking for outside investment, so is finding a way to translate that into revenue. 

When approaching investors, you don’t necessarily need to be revenue-generating already, but you do need to show them you’ve thought about monetisation, sales cycles and buyers (if distinct from end users). If pre-revenue, what is the estimated time to revenue and what acquisition and distribution channels are you using as part of your go-to-market strategy? If post-revenue, what is the nature of those sales? Are they pilots or longer-term contracts, one-off or recurring? Investors will likely want to dive deeper and understand buying patterns, customer spend, engagement and retention. They might also enquire about the biggest pushbacks you get from customers when trying to sell your product.

What is the scope for scale and what are the key growth drivers of the business? What are you choosing to measure and why?

Investors often ask founders which KPIs they monitor, why they picked those and which changes they could make to significantly improve them. 

“This question intends to drill deeper into the nuts and bolts of the business and helps us identify potential levers and also roadblocks together with the founders. It also gives us a good feeling for the analytical rigour of the team and their ability to focus on the truly impactful drivers of their business,” shares Pollok. 

You need to indicate to investors that you understand the economics of your business. That you can and are moving towards building a sustainable business, where you eventually make more than you spend on each customer, and that it will get better, not worse, as you grow.  

How much, if anything, have you raised so far and how did you use that capital? Which founding hypotheses have you already proved or disproved? What are you trying to prove or disprove with this round?

Pollok details Visionaries Club’s approach: “We look at every round as a set of hypotheses that founders and investors have to agree on and be very specific about. Early-stage startups, especially in the pre-seed and seed stage, don’t need to have it all figured out yet. Instead we think of these early stages as a sequence of experiments around hypotheses, which will either lead to the success of the original business model, a pivot or the realization that the business fundamentally won’t work out.” 

How much capital do you estimate you need to achieve the next set of milestones? What runway would this amount give you?

Before approaching investors you need to have an idea of your capital requirements and how are you going to put the new capital to good use. Investors will want to get some comfort that you’re financially literate, have an understanding of current and expected cash burn and are raising enough capital to then get to the next point you want to achieve before having to, likely, raise capital again. At the early stages, investors will not look to see detailed financial models and forecasts but will find comfort in seeing realistic mapped expenses and your assumptions behind them.  

They might also be looking to test your ability to balance short-term and long-term thinking. You may have a big vision for the future but what do you need in order to get to the next intermediate step?

Nangia adds that she always asks to see the capitalisation table. She has found in a few cases that female founders have already at pre-seed and seed given up too much equity without realising the consequences of it. This makes it harder to raise follow-on funding from VCs, who then would like to see a recapitalisation of the business before investing.  

What are the key risk factors that you need to navigate? Why might this business fail to succeed? 

Provide potential investors with confidence that you have an understanding of risks and an idea of how you might be able to mitigate (some of) them. 

“If you could ask yourself one question about the business in two years time – a question that you don’t know the answer to today – what would you ask?” adds Wenner. “We have found this to be a good way to suss out the biggest unknowns or threats founders see for their startup in the future. This type of concern doesn’t typically feature on a pitch deck, but feels important to crystallise early on.” 

“What keeps you up at night? What are the biggest challenges today?,” Linamagi likes to ask. “It allows me to understand if this funding round can help solve these challenges, can I/we support the team, where are the gaps. I like to see founders who are completely transparent about it and can play out different scenarios.”

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