Fundraising FAQs
Common questions that investors ask and how to answer them.
In the past 5 years, I have raised 3 rounds of investments from funds and angels based in the US and India. I have spoken with 50+ firms in this process and observed a few patterns. My conversations significantly improved as my understanding of the market, customers, and business improved. I am sharing the lessons learned through common questions that I got from most investors and the ways in which I answered them. I hope this will help other entrepreneurs prepare better for their fundraising journeys.
A few thoughts before we begin:-
Game theory - Fundraising conversations with good investors are like a good game of chess. It is game theory at its best with rational actors who can understand what is said and what it actually means.
Us versus them - A lot of fundraising advice that I had heard made it sound like it is a battle between startups and investors. That investors want startups to execute on the investors' agenda. Instead, our found the goals of investors and startups extremely well-aligned, at least at our early stage. They all want us to have a healthy business, strong customer love, well-defined vision, happy team, a clear path to a big outcome, and so on.
Sizzle and steak - Startups need to balance the sizzle of big ideas and even bigger promises with the steak of numbers, roadmap, customer testimonials. A successful fundraise needs a solid foundation of good business practices and evidence of strong execution. At the same time, it needs a good believable narrative that shows how our tiny company can challenge incumbents or change user behaviour.
The marriage analogy - Elevator pitches and demo days are like pickup lines but a funding round is like a marriage. Like a pickup line, a good one-line pitch will get attention but cannot deliver an entire fundraise. It is OK if we do not have a smooth delivery of a 60-second pitch. What is more important is that investors can see a successful partnership in the next 10-15 years.
With these thoughts out of the way, below are some FAQs that I heard from investors and my approach to answering them.
"What do you do?"
What they are evaluating: This is usually one of the first questions which makes this a crucial one. Investors evaluate 1,000+ startups a year and they use such questions to slot startups into buckets that they understand. More than hearing a well-rehearsed pitch that covers everything in 60 action-packed seconds, they want our help with this slotting. At the same time, they want to gauge our confidence, communication skills, and clarity of thought.
How to answer: Regardless of who introduced us, how much material we sent ahead of time, we should assume they have no idea about what we do. There are multiple slots in an investor's head - B2B vs. B2C, industry, similar large companies, high-growth vs. normal, and so on. A good answer will cover some of these points while helping them understand the problem we solve. This is how I answer:-
"Our collaborative design product helps businesses make on-brand creatives in minutes instead of waiting 2 weeks for agencies who use complex software like A. We are at $xM in revenue growing y% monthly with customers like t, b, d."
"Who do you sell to?"
What they are evaluating: They want to know who the buyer is as that tells them a lot about the potential headwinds and tailwinds that you will - budget, buying process, competition. They also want to know if you have clarity about who needs your software as that determines our go-to-market strategy. No or too wide a focus will tell them we are still early in our go-to-market process. Or that we will spread ourselves too thin before we get to meaningful scale.
How to answer: The balance to be struck here is to show focus on a persona that is well-defined and large or can translate into other personas once you crack this one. My answer:-
"We sell to marketers at mid-size e-commerce and retail companies in a, b, c geographies. We are also seeing inbound interest from a, b, c industries but we will focus on that only next year."
"Is this not a crowded space?"
What they are evaluating: Investors who slot you in too broad a category ask this. Most investors do not know specific companies in a given niche. Believe me, I have asked several of them point blank to name 3 companies and I have never received an answer better than - "But I am sure there are tons of companies in this space!". A reasonably sure bet for investors is in the Goldilocks zone between "too many competitors" and "no one else is building this". Apart from this fit, investors want to see how we differentiate ourselves from competition. This is important for customers during their buying decision so this is not just an academic question.
How to answer: If this is a crowded space, we should help investors see how we focus on a particular segment of it that is large enough and where we are better than everyone else. This segmentation can be done in multiple ways:-
Customer size - We can show how the product varies greatly based on how big the customer is. Individuals, small and medium-sized business, enterprises are broad categories.
Industry focus - The same core product will do many more ancillary things when solving the problem for a particular industry. A banking solution will have different needs from the same product for e-commerce.
Type of product - Companies can deliver the same benefit to customers in different ways. An agency or consulting company can do it with a team of experts. A powerful point solution can do it if it integrates well with everything else that customers need. An API provider can do it if customers have developers to piece together a solution. An end-to-end solution paired with managed services can do it but at a much higher cost.
Price point - This is related to the first point. Larger companies typically focus on large customers and are expensive. Startups can focus on small or mid-size businesses with a cheaper offering. Or they could take the other route and offer a more powerful version of a consumer product to enterprises.
"A and B are multibillion-dollar companies in this space but they focus on individual users not teams. C, D, and E are established players in the space but offer managed services for verticals like advertising or e-commerce. Both are not suitable for marketers looking for a self-service product that fits their custom workflows and multiple use-cases."
"Why is no one else doing this?"
What they are evaluating: This is the flip side of the previous question. Almost no business operates in a space that does not have competitors. With thousands of new businesses started every day around the world, there is a very small chance that we have no competitors. Investors are trying to gauge how we see competition. Too narrow a focus on exactly what we do indicates that our worldview is not focused on customers but on ourselves and our product. Customers are trying to solve a problem that they are facing. They are not looking for a specific set of features or looking for a particular industry vertical. This means their problem could be solved by a totally different type of product than ours. We need to see this and plan for it and that is what investors want to know.
How to answer: Framing our industry in the context of the job to be done by the customer is a good way to answer this. Help the investor understand the problem being solved and the different ways in which customers solve the problem today. If there is no problem to be solved and no existing broken process to be fixed, we should question whether we should be in the business we are in. If there is an acute problem, customers are solving it in some way and we should let investors know why those solutions are not the right fit. My answer to investors is:-
"Every large business we speak to solves this problem with decades-old processes involving complex desktop software, large teams, and a hodgepodge of collaboration, storage, and ticketing software. Like oxygen or water, these solutions have always existed. We are offering a better way to solve the same problem."
"How big can this get?"
What they are evaluating: This is probably the most important question in investors' minds even if they do not ask us this directly. And that is why it is a question we need to answer in different ways throughout the conversation. Investors have a responsibility to deliver a large financial outcome to their funds' investors. They can do this by owning as large an ownership in companies as they can and for those companies to exit at as large a valuation as possible. The size of this outcome is determined by the size of the market, the slice of the market that we can capture, how we can grow into other markets, and whether we will grow into a large standalone company or something that gets acquired by another company. We need to cover all of these points. Apart from the hard numbers, investors want to understand our ambition, how we think of the market size, and the role we will play in it.
How to answer: We need to balance visionary storytelling with hard numbers. We need to convey the actual size of the market and factors contributing to make it grow larger. We should showcase favourable factors that will aid our growth. We also need to walk them through the step-by-step process of how our small venture will grow into a massive enterprise. This is how I do it:-
"ABC makes $XB a year selling desktop software to designers. Businesses spend 10x+ this amount on designers and agencies to use this software and make creatives. Despite this cost, they wait for weeks for their creatives. We will organise this mess and this alone is a multibillion dollar opportunity. In doing so, we will be the system of record for all visual content that businesses use to communicate with their customers. Over time, we will also help them do the communication through us instead of standalone A, B, C software."
"What else could you do after this?"
What they are evaluating:
How to answer:
"How much are you raising and at what valuation?"
What they are evaluating: As with other questions, the actual figures are less important than the clarity of thought behind them.
How to answer: Answering this is somewhat like answering in a job interview "what are your salary expectations?". A number that is too high shows naïveté or over-confidence. The over-confidence might be justified by other factors - other investors' offers, meteoric growth, .... Too low a number or saying things like "I am OK with anything that the market decides" sounds desperate to an investor. Investors expect good founders to maximise the outcomes for themselves, their team, and their investors. Asking for low or no numbers is a red flag for investors. I answer this directly and with my explanation:-
"We are raising $x at a $y post-money valuation. This will help us increase our revenue from $z to $(x+z+Δ) in the next 18 months so we can raise a strong Series abc".
"Where are you in your fundraise?"
What they are evaluating: The first thing they want to know is how quickly they need to move. If you say "I am still exploring my options" or "I am just testing the waters", they know there is no rush and they can focus their limited time on other deals. If you say "I have two term sheets and I am closing this round in a week", they know there is no point starting this conversation unless you are an absolute rocket ship. The second thing they are evaluating is how "hot" you are. An alternate version of this question is "when did you start your fundraise?". If they get a sense that you have been trying to raise this round for 6+ weeks and still doing intro meetings, they know things have not gone well with the other investors. They can use this as a signal for their conversation with you. It is not a deal-breaker but certainly looks bad and requires someone willing to go against conventional wisdom to take a bet on you.
How to answer: You want to show that you are serious about the fundraise and that this is not idle conversation. You also want to showcase momentum of your company without exaggerating or making them think it is too late.
In the early days of the fundraise, I used to say:-
"We started our fundraise 1 / 2 / 3 weeks ago. We have had a few partner meetings and are happy with the response we are seeing. We want to close this round in the next 4-6 weeks. Does that timeline work for you?".
As we had more positive conversations, I used to say:-
"We are in advanced stages with 2 / 3 / 4 funds who are doing customer diligence. 2 / 3 / 4 other funds are evaluating our data room. We expect to close this round in the next 4 weeks. I do not want to create an artificial urgency so please go through your usual process. I am being upfront with you so you know where things stand.".
"How much of your revenue is from abc markets?"
What they are evaluating: Investors value revenues from developed markets more than revenues from emerging markets. While they might be bullish about emerging markets in the long run, they have seen a fair share of companies struggle to grow in emerging markets beyond a point. They have seen many others grow a lot faster once they shift their focus to developed markets. Of course, no one will say this publicly lest it blow up in their face like it did for Snapchat.
How to answer: I have been on both sides of this. In our early days, 70%+ of our revenue were from developed markets. In the recent months, we have seen a lot of traction from emerging markets. I try to combine the best of both worlds when I answer this question. My typical response is:-
"x% of our revenue is from abc markets and this has grown y% in the last year due to strong referrals from our early customers. Though our focus is xyz markets, we are very happy with the validation from abc markets which is going to grow z% in the next 5 years.".
"Who are the other companies in this space?"
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"Why are there no large companies in this space?"
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"How are you different from your competition?"
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"Who are your biggest customers?"
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"How has your traction been?"
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"What is your customer acquisition cost and lifetime value?"
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