I wrote an article titled +300 questions VCs asked, in which I compiled over 300 questions asked during +200 meetings between startups I supported and venture capital funds. The article received a lot of interest, a lot of positive feedback, but also a lot of questions, so this time I’d like to focus on a summary and conclusions to help startups prepare for fundraising.
This article first appeared on LinkedIn.
The key conclusions are several.
Conclusion 1: the key to successful fundraising is good preparation for the round
It is very important to prepare the startup/founders well for the round. While my list can help with this by providing the right direction, it is no substitute for the work that needs to be put into such preparation. Not only is it important to prepare the pitch deck and the pitch itself, but also:
- financial model/ (historical data and forecasts, preferably on a monthly basis for the previous two years, the current year and two years ahead)
- key metrics and statistics (if not included in the financial model)
- cap table (ownership structure) indicating current structure and fully diluted (thus also showing ownership structure including promised shares e.g. under ESOP or convertible notes/safe notes program)
- detailed market analysis
- detailed competitive analysis
- analysis of financial rounds, mergers and acquisitions (M&A), and exits in competing companies
- sales funnel with indication of leads at a given sales stage
- product development roadmaps
- statistics of product/service usage by clients (number of logins, time per session, analysis by cohorts, etc.).
A team prepared this way should have no problem answering most potential questions.
Conclusion 2: Understand the business model of VCs
Founders should understand the business model and perspective of venture capitalists before fundraising. Funds are primarily looking for projects that have the ambition and potential (though not a guarantee) for dynamic growth in the coming years. This means a minimum of 100 percent year-on-year, and realistically even a two- or threefold growth within a year.
Usually VC funds do not realistically expect a startup to become an unicorn (to reach the value of more than $1 billion), most of them expect that by investing in a given company it has the potential to return the whole fund.
So if a VC fund plans to have a total of 20 companies in its portfolio, then while investing in a startup, the fund must believe that from the sale of shares of this startup it will get a return of at least x20 of the invested amount; in the case of a fund with a capitalization of PLN 100 million, this would mean that with an investment (including follow-ons) in a company in the amount of PLN 4 million, the fund must believe that there is a chance to sell shares of this company in 5-7 years for the amount of PLN 100 million.
Analyzing the questions asked by VC funds, it is clear that directly or indirectly most of them are aimed at determining whether a given startup has the potential to return the entire fund, i.e. grow x20 or more.
Conclusion 3: The most important questions from the fund’s perspective are usually not asked directly, but most of the questions that a startup will hear lead to them
The most important questions from a fund’s perspective usually don’t come directly, but they lead to most of the questions a startup will hear, so:
- Are you able to grow min 100% year-over-year (and preferably x2 or faster)?
- How can you make that plausible?
- Is the sector and niche in which you operate large enough to sustain this growth rate for the next few years, so that your company can grow min x20?
- Is your product/service good and unique enough?
- Are you sure you have analyzed the market and competition well?
- Will your company grow x20 or more in 5-7 years?
- Can you as a founder build and manage an organization that will grow so fast?
- Are you aware that by going the VC route you will have to do several more rounds of funding before you can exit?
- Why should I believe that by investing in you in 5-7 years we will earn x20 or more?
A member of the Warsaw Equity Group fund team. Previously he co-managed three VC funds: Skyline Venture, bValue Bridge and bValue Starter.