6 Common Questions Venture Capitalists Ask

Startup founders know that sourcing and then actually getting an infusion of venture capital can be quite a feat. The economic climate is always in flux, as is the nature of the competitive landscape. As a result, startup founders must do their research before approaching any potential venture capitalists (VCs). It is essential to know the type of businesses the VCs tend to invest in and how well those ventures are faring to ensure the right avenue is pursued. Of course, startup leaders must also be aware of the expectations and requirements the VCs will have, so that they can be well prepared in advance. VCs will no doubt have a ton of inquiries, and if things progress, a lot of concrete data will be requested and scrutinized. Here are some common questions startup leaders must be prepared to answer:

What is the market and revenue potential for the company and the sector as a whole?

A startup will not do well if the leaders of the company do not have a strong grasp of the market sector in which it resides. And, VCs are not going to invest in a venture unless and until they understand the overall market and the company’s potential within it. Thus, startup leaders must be well versed in this subject and be able to explain how the company will be able to succeed in light of industry circumstances.

Who are your competitors and what sets your company apart?

In addition to understanding the overall sector, it is critical to learn about the other companies that are competing in the space. VCs are not interested in investing in a company that is simply going to provide more of the same. There has to be a clear and unequivocal competitive advantage that sets your company apart.

What distinguishes the management team seeking to lead the venture?

The best idea in the world will not succeed unless there is a strong team with a clear vision that is able to execute a well thought out strategy. VCs are going to be very interested in the management team’s background and qualifications. Granted, this does not mean that everyone has to earn an MBA from an ivy league institution, but being able to speak intelligently on company matters and carry out the mission and strategy are vital.

What are the risks, opportunities, and anticipated growth potential?

Any investment brings along its share of risks and opportunities. Of course, with venture capital, there are often greater risks, as they are more likely to hedge their bets on companies willing to enter into unchartered waters. There simply has to be a realistic assessment and portrayal of the probable risks, as well as an honest representation of the company’s anticipated trajectory and the likely return on the investment.

Who is the customer base, how are the customers acquired, and what is done to retain them?

VCs do not just invest in innovative ideas or the leaders who come up with them. They also want to understand the people whom the company will be serving, and this is particularly apposite when it comes to offering goods and services that target millennials given their current influence in the marketplace. As a result, startup leaders need to know everything about the type of customer they are attracting or hope to be attracting, and figure out how to ensure they will remain loyal and satisfied.

What is the end goal and/or exit strategy?

Although there are plenty of entrepreneurs who want to build and run a business until they are no longer able to do so, there are a number of others who hope to go public or get acquired for a handsome return as quickly as possible. Regardless of what the end goal is, VCs are definitely going to be interested to learn about the eventual exit strategy, and this will often make or break their decision to move forward.