12 Most Critical Questions for Raising Capital for Your Startup – 12most.com Guest Post

Stack of 100s at 12most.com

This was my August 16, 2011 Guest Post on 12most.com.

Right now – RIGHT now – is the BEST TIME to start a business, and there’s never been a better time to start raising capital. I firmly believe this. Why?  Because tough economic times cause tremendous dislocation in almost every market. Established companies are playing defense, trying to figure out where the economy is heading, laying off people, cutting costs, and trying to protect their turf. Fear is in the air.

Fear spells opportunity for new startups that can compete because they are small, nimble and agile.  Using creativity and resourcefulness, entrepreneurial startups can improve the way things have been done in the past, or attack brand new markets with new technology.  Startups are not encumbered by the baggage of their larger competitors.

However, raising money in tough economic times is, well, tough!  Angels and VCs seek to cherry pick the very best ideas, those that are most likely to succeed.  Money is still available for the best ideas and teams, but you have to be tuned in to what these investors need in order to make an investment in your startup.

Based on my experience as an entrepreneur, mentor, angel, VC fund LP, and board member, here are the 12 most important questions you need to answer when raising capital for your startup:

1. Money

How much do you need and what is the use of funds?

Investors want to know that you have thought through your capital requirements and where the money will be put to use.  Is it for product development, marketing, building out your sales team, etc.?  You must be ready to justify this request, and talk about how this gets you to the next stage in your startup’s development, as well as how much more money you may need in the future.  Know what kind of deal structure (preferred stock, convertible debenture, common stock, etc.) and valuation you are proposing to your investors.

2. Pain – What pain are you fixing?

Your product or solution must fix somebody’s pain, whether it’s making life easier, saving money, or making a customer more efficient.  Talk about the severity of the pain you are addressing, as well as how much money your customer will pay for it.  Show some basic market research, ROI analyses, and, ideally some 3rd party customers who are already happily using your product or service.

3. Raising Capital for Your Solution: What is it, exactly?

Exactly what product or service are you offering and how does it work?  Too many times, I have seen wishy washy descriptions of the solution because the idea is being matured, or in Alpha mode.  I have seen many super smart engineers with grand plans that are completely unfocused trying to be everything to everybody. Few have been funded.   Investors want to see certainty and simplicity in your proposed solution to the above-mentioned pain.

4. Customers – Who, exactly, is your customer?

You need to know WHO will be buying from you.  Are you selling B2B, B2C, B2G, all of the above?  Are your targets Fortune 500 companies, SMBs, NGOs, the Federal government, etc.  At what level are you selling (CEO, CFO, VP of Marketing, etc.)?  What kinds of situations will they need to be in to absolutely must buy from you?  The more precise the better.  And bring some testimonials or anecdotal evidence from these targets.

5. Execution Plan – What’s your plan for selling and delivering?

One of the biggest questions and concerns investors have is HOW you plan to win customers.  What’s your strategy, who’s leading the sales effort, and so on. Be prepared to discuss not only your marketing & sales plans and customer acquisition strategy, but also your customer retention strategy.

The Angel on Your Shoulder

6. Raising Capital, as a Team – Who are the players and what are their backgrounds?

Angel investors are not only investing in an idea or a market space.  We are investing in a team of people with, preferably, a strong and experienced founder.  Talk about your key executives and your advisors too (lawyers, accountants, Advisory Board members), anyone who is adding considerable value to your venture.

7. Culture – What kind of culture are you building?

Culture is the DNA of every organization, and good culture is a requirement for success.  Culture can even be a differentiator against your competition.  The best investors know this.  Talk about your culture, your approach and philosophy towards business operations, leadership development, hiring, customer care, product development, and other key parts of your business.

8. Competitors – Who are they and how will you compete?

Competition is one of the most important questions to answer.  I have met with countless entrepreneurs who claim that they have “no competition.”  This is a particular pet peeve of mine, because every company has competitors, and all customers have choice.  Believing that you don’t have competitors is not only naive, it is a recipe for disaster.  So talk about all your competitors, both direct and indirect, and show how you are better and how you will beat them.

9. “Moats” – How are you special and what are your differentiators?

Warren Buffett likes to invest in companies with high barriers to entry, or “moats,” as he calls them.  Startups are risky enough for investors, and they want to invest in ventures which have a higher probability of success.  Moats include IP, patents, unique skills or knowledge, proprietary methods, unique brands, unique culture, etc.

10. Raising Capital for Pivotability – What will you do if your Plan “A” fails?

One thing is absolutely certain in a startup: your original plan will not happen the way you initially envisioned it.  Investors want a team that’s resourceful, agile, and creative enough to pivot, if necessary.  A sailboat in a regatta does not go from Point A to Point B in a straight line.  It gets there by “tacking, ” or making a series of rapid and opportunistic turns in order to maximize the wind in its sails.  Startups have to do the same thing, and investors want to see that you have thought through your contingency plans.

11. Commitment – How much money did you personally invest? Is this a full time job for you?

The best investors take a “partner” approach to investing, and they want to invest alongside their entrepreneurs.  I’m not so much looking for huge sums of cash invested, but rather whether the amount invested is a “significant” percentage of the entrepreneur’s net worth.  If a founder has put a good chuck of her net worth into the company, or taken out a second mortgage on her home, the investor will feel more comfortable about the founder’s putting her money where her mouth is.  As for working “full time,” this is essential.  I have never seen a startup succeed that didn’t have full time (80 hours a week) commitment from its founding team.  Be ready to field questions about how much your team is willing to sacrifice in order to win.

12. Exit – How are you going to make your investors money?

Investors are not looking to put their money in forever.  You have to paint the picture of how they will get their money and profits out within their expected timeframe (generally 4-7 years).  Be ready to talk about how you’re going to exit (for example via IPO, sale, recap, or refi).  How is the market for your proposed exit options?  Talk about recent deals in your space and get some data from the experts (M&A specialists, deal lawyers, etc.).

I hope this helps you as you think through your approach to pitching angels and VCs.  If you believe in your startup, then be persistent. Don’t give up!  If you can’t get funded initially, then prove out your business model by getting traction, i.e. happy customers, and figuring out other creative ways to raise the capital you need, whether it’s by getting equipment leases, vendor financing, customer deposits, or even money from “FF&F” (friends, family and fools).

Good luck out there!  It’s a great time to pursue your dreams!

Photo courtesy of amagill. Some rights reserved; used under creative commons license.
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16 thoughts on “12 Most Critical Questions for Raising Capital for Your Startup – 12most.com Guest Post

  1. Very good points. With very little experience in this area, I think that #12 isn’t really on the table at the beginning of starting a company. I can claim that Santa Clause is going to buy my company or I’m going to have an IPO. Five or ten years down the road when the company is ready to exit, things will be 1,000% different than when I first pitched for capital and neither Santa nor an IPO is best. I guess what I’m saying is, projections aren’t worth anything, because nothing works out the way it’s planned.

    Am I way off on this?

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    • To your point about exits, an investor wants to know that the entrepreneur has thought about how to achieve a liquidity event. It’s important to show the investor a path. Identify potential buyers by industry and by name. Research the kinds of multiples of revenues and EBITDA comparable companies are getting in the M&A market. While true that your situation at exit will liekly be VERY different from when you launched, and that projections are an academic exercise, I think it’s important to think through the scenarios and assumptions you make when you plan. I have always said that the benefit of planning is the PROCESS of planning rather than the plan itself. Thanks very much for your comment, Masoud!

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  2. My team has proven, through independent laboratory testing and hundreds of jobs in the field, the tremendous value added of what is now a patented building remediation product. All prior methods of addressing this particular remediation issue are unbelievably archaic, and are time-consuming, expensive and displace people from their homes. The CDC now affirmatively states that the problem we solve is a definite health issue, and with every flood or hurricane, millions of new sales opportunities arise. I’ve drafted a very good business plan, with exhaustive financial projections, but in our backward state, I can’t find anyone of sufficient intellect and experience to seriously review this stunning opportunity to purchase the patent and implement the business plan. There is an angel group here, but they’re a joke, out of money, and won’t even attempt to enlist their syndication partners. Now what?

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    • Ron, thank for the Comment. Be persistent, stay the course, and build your business independent of financing; in other words, try and bootstrap. If you make good progress the investors will come. Good luck!

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  3. I especially like the one about “moats”. That’s a more idealist view for the ideal startup. Some startups don’t need to be in a business with high barriers to entry, just focusing on taking something that’s already being done, and improve on it. Especially in a big market with lots of customers that solves a big problem…many may already be tackling that market – their way.

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    • Great point, Marty. Many successful businesses have been created by people building better mousetrap or doing something incrementally better. You are right! In my former company, I kept exhorting my team to do a “B+” job because we were in an industry dominated by “C” players. That’s how we grew market share. Thanks for the comment!

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  4. What a great read Tien! From my experience, the one area all entrepreneurs fail in is an understanding of their financials. Having been an angel investor for over 11 years, I have seen, like you, so many great ideas go down in flames becuase the company president had no idea what a term sheet was, what preferred stocks or debentures are, or their valuation was so high the deal made no sense. Perhaps, you should have a #13 Realisiic Valuation and understanding of financial principles by managment.

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    • Thanks for the Comment Doug. Your point about #13 is a good one. Too often, the founder comes in with a sky-high valuation which makes no sense to rational investors. Only after getting a lot of other term sheets and some rejection, do their expectations of value seem to become more realistic. Sometimes, too, it’s not the founder’s fault that they don’t understand the financing structures because they are engineers or non-financial people by training. That’s still no excuse for not knowing what they are offering to outside investors, which is something they need to take very seriously. Thanks again and I hope to see you in a few weeks!

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  5. Sometimes, in talking to entrepreneurs, I ask a really stupid question (not difficult for me to do!), or I get a bit haughty or insistent. Basically, I want to “push” them a bit and see how they react. If they can’t handle mild pushback from me at this stage, they certainly can’t handle it under real stress.

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  6. Hi Tien – great post. I normally would also want to hear about the vision. how does the entrepreneur see the world differently, and if there is a path to get there.

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  7. Very interesting post. When I’m talking to software entrepreneurs, I like to ask point # 10 in a slightly different way. I like to ask how they will know when/if they should pivot their products, because I’m very impressed with teams that understand the importance of analyzing the way their customers/testers are actually using their software, and incorporating that feedback back into their decisions. Everyone pays lip service to being receptive to feedback, but very few actually have a serious “feedback loop” that helps them continuously collect feedback and sort out the patterns to improve the company. A realistic plan for doing this definitely gives me confidence that a startup is going to be both small and nimble, and not just small.

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    • Thanks for the Comment, Will. You are right that most pay lip service to being receptive to feedback, but in a startup as you know, it’s critical. It’s not easy to tell which entrepreneurs will be better at this. Many successful companies would have failed had they not been open to feedback during their startup phase.

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