As a Venture Capitalist eyeing a new startup, the decision to invest involves weighing risk and measuring opportunity. Making the right choice can lead to big payoffs, but taking too long during the consideration phase can cause you to miss out on a promising idea or a hidden gem. To help you navigate the delicate balancing act between due diligence and striking while the iron is hot, here are the top five questions any VC should ask a startup entrepreneur.
1. What is Your Prime Motivation?
A CEO's motivation for starting a company can give you a lot of insight into the viability of the startup. Asking about their prime motivation will help you discover whether the entrepreneur and his team are qualified to helm the ship. This question provides a snapshot of the reasons why the entrepreneur initiated the startup, and allows you to see whether they have a passion for the business or if they are simply looking for a way out from the corporate grind.
2. What is Your Anticipated Revenue Model?
It's no secret that the main reason to invest in a company is to make money. Asking for an anticipated revenue model requires the startup team to articulate their strategy. Gauge the responses with an towards solid, specific answers. Do they have a direct sales model, or will they go through channel partners or an affiliate program? Is it a B2B product or are they focused on the consumer market? What types of payments will they accept? What is the product's price point and how was that price decided? Any CEO should be able to easily answer these questions.
Profitability is a major concern as well. Find out how long will it take them to become profitable and what barriers must be overcome. Look for any red flags in the revenue stream and see if their timeline matches your goals.
3. How Much Money Do You Want to Raise?
Any CEO will easily be able to tell you how much money they want to raise, but the real key is tying that revenue to articulable goals. Again, look for specific answers on why they need to raise money and how that money will be spent. As part of this question, it is essential to know how your investment will be used: will it bring the the company be closer to profitability, free-up cash-flow, or be used to satisfy other obligations? You may want to conclude your inquiry with asking how the company plans to proceed once your investment has been spent. Will they need more investors to complete their goals, or will your funds propel them beyond their initial fundraising stage?
4. What's Your Market and Who Are Your Competitors?
Ideally, as an investor, you will conduct your own research on this topic. However, it's essential to hear a CEO's take as well. Find out how large the market is for the product, and if that market is actually growing. Additionally, find out what the CEO knows about their competitors and how they do business.
5. Who Is Your Ideal Customer?
Find out not only who is the ideal customer, but also what type of ROI the product gives customers. Ask who they sell to specifically - consumer, a CIO, a VP of Marketing, etc. It's also crucial to discover whether the target customer has room in their budget for the proposed product or service: can they afford it and will they buy it? Finally, inquire as to whether the CEO has a good grasp on the level of market penetration necessary for success.
Knowledge is power, and that cliche is especially true when it comes to the heady world of startups and venture capital. Asking questions that get to the root of the startups purpose, goals, and strategies can give you, as a VC, a better idea of whether the risk is worth the benefit and if your own business goals are are compatible with those of the startup you are considering.