7 Key Questions Venture Capitalists Ask Before Investing In A Start-Up

Venture capitalists are wealthy investors who are willing to put their money into fledgling businesses in return of an equity stake. However, it is not easy to please these industry veterans and professional investors who have a knack for judging the potential of a venture. It is a high-risk proposition for them as they stand to lose all the investment if the business fails to accomplish its goals and become profitable in due course.

Thus if you have a start-up or plan to purchase a near-new business for sale in New Zealand, then you need to be ready to present a compelling pitch to the venture capitalists to get a desirable result. The most significant parameter for them to show interest in a start-up is that it should fall in the domain that is preferred by the VC. Also, to impress the investors, you must be prepared to answer their questions with confidence and straightforwardness.

So here is a list of the seven key questions that VCs ask before investing in a start-up to help you to gear up for the funding discussion stage.

1. What Is The Business And What Impact It Can Make?

The first question without any doubt is directed towards the type of the start-up, its business model, sector, target market, and competitors. VCs will have to identify a big opportunity to become interested in the proposition. Thus you must showcase the scalability and the market potential of the venture. However, most VCs have to listen to several ideas from budding entrepreneurs every day.

Thus it is imperative to showcase the unique selling point of your business, which will be valuable to the customers. You must inform them about how the idea will help in filling a gap between what is being desired and what is being delivered to the consumers. You will have to explain the sustainability of the business in the long run and how it will stand up against the competitors. The strategy will have to be presented with facts and figures collected through market research to substantiate the claims.

2. Who Are The Founders And What Are Their Capabilities?

The next pertinent question is related to the qualifications, experience, skills and level of passion of the founding members. VCs will enquire about all the key stakeholders in the business and the management team and how many more might come onboard with time. They will want to know how these members intend to execute the business plan and how determined are they to take it to the next level.

Thus the entrepreneurs will have to give a clear picture of the short-term and the long-term goals. The VCs will evaluate the drive and the determination of the founders from an investor’s perspective so you must come across as committed and dedicated professionals who are equipped to face all the business challenges. The leader of the organisation can make a lot of difference in its success and failure. Thus the VCs will keenly observe these individuals.

3. How Has The Start-Up Been Faring So Far?

The next question of the VCs will be about the feasibility of the venture and how successful it has been in gaining customers in its initial phase. The entrepreneur must be able to effectively portray the interest reflected by the customers in the branding and introduction stage of the business lifecycle. If the company has started grabbing the attention of the consumers and is generating considerable sales, then it will have a secure future.

It can be proven through customer testimonials provided by satisfied clients, persuasion-level achieved through advertising and marketing, awareness among the consumers, etc. The VCs will stress on understanding the ways of creating an iconic brand identity and business, and this can be displayed with the help of the business plan and the projected return on investment.

4. What Are The Risks Associated With The Business?

The business owner must be ready with the SWOT analysis of the start-up as the VC will be interested in assessing the threats and weaknesses of the venture. Although most seasoned investors have a fair idea of the weaknesses and threats associated with a start-up, they want to understand the competence of the entrepreneur in envisaging these challenges.

Thus you must provide them with all the reasonable risks that can hamper the growth of the company, such as technological challenges, legal obligations, competitors, cyber threats, economic downturn, etc. Also, you must present a systematic plan of dealing with these issues if they crop up at any point in time.

5. What Makes The Product Stand Out?

If you have designed a revolutionary product that has never been seen before in the market, then it will be a total sell-out with the VCs. However, if it is something that is already out there, then you have to convince them of its viability. You will have to elaborate on how you will carve a niche in a cluttered marketplace.

For instance, if you are selling a premium-quality product which is priced accordingly, then you have the advantage of becoming a luxury brand which may not have to fear other average brands. Thus you must have a strategy and plan in mind that will help you to gain a bigger market share in less time. You will have to talk about distinguishing features and the advancement propositions which are needed by the users.

6. How Will The Funding Be Utilised?

While presenting the business plan, the entrepreneur must also provide the financial data of the company. It must have the details of the initial investment, loans, and future projections of profits and bottom-line. It will help the VC to understand the financial standing of the start-up and how much funding it needs to achieve its goals without facing a deficit.

The pitch for investment must also provide the details of the amount required and by when it will be utilised and start offering returns. All these documents will allow the VC to comprehend whether the amount being asked is reasonable or not.

7. What Will Be The Exit Strategy?

Investors are concerned about their investment and want to know when they can get the return and the initial amount back. It must be covered in the financial projections so that the VC gets an idea about the timeline of the investment.

The projections must take into account the annual management fee and provide the percentage of return on investment that will be enjoyed by the VC. Thus you will have to submit the balance sheet, profit and loss statement, cash flow statement and the ROI analysis using advanced accounting tools and software.

Conclusion

An entrepreneur presenting an idea to the venture capitalists must make sure that it is realistic and appealing for the investors. If you own a start-up or have been planning to purchase a business for sale in New Zealand, then you must keep the questions above in mind to prepare a winning pitch.