Investor questions are dreadful to new startups. However, entrepreneurs need to be prepared when pitching their startup companies to investors by anticipating the investor questions they will receive. Presenting to potential investors will involve as few as 10 and as many as 100 questions.
Investor Questions 101
We have focused on the Top 10 Most Common and Gruelling Investor Questions entrepreneurs can expect when presenting their Business Plan.
The failure to have thoughtful and reasonable answers to these questions will decrease the likelihood of the entrepreneur’s company getting funded. Following is a list of key investor questions all entrepreneurs should be well prepared to answer during their investor pitch.
Investor Questions #1: How do you sell this to customers?
What They Mean:
Entrepreneurs need to know how to communicate and how to sell a product. By asking this question, investors want to know how you would pitch this to customers and whether you can do so yourself. The reality is you will suck at pitching your startup when you first start, but you will get better over time. The founders will be the ones who do the first deals and perhaps will continue to do so over time. You can’t just hire a Sales Director and assume everything will work out. Being unable to sell your own product/company/service when put on the spot by an investor is a huge red flag!
What You Must Remember:
You need to be able to pitch the investor there and then and communicate the key points of your business like you would with a client. What is also important though is to remember that you are in a pitch meeting to close the investor. You need to do just enough and spend just enough time to answer the question and impress whilst also being able to allocate enough time to get through all the other key points that you need to communicate, such as the team, your product, etc.
Always make sure you enforce the size of the market! Not being able to sell your own product, company, or service when put on the spot by an investor is a huge red flag!
Investor Questions #2: What are the main objections leads have?
What They Mean
Whilst this is an interesting investor question, the investor is trying to discern what is wrong with you! What are your bottlenecks, where do you need to improve, why aren’t you going faster, etc.? It’s best not to lie too much here; you don’t want to get caught on something the investor can figure out themselves, especially if it is obvious or comes out in conversation later.
Before you answer this investor question, you might want to pause and reflect and communicate an honest and understandable answer. Never go into the pitch meeting guns blazing talking about how awesome the market is, how your company is the best thing since sliced bread, and how there are no risks. Optimism can be your downfall! No one market is not THAT awesome. Your company is NOT the beginning, all, end, all to investors. And there are ALWAYS risks.
What You Must Remember
As a rule, the top three main reasons why people have objections to startups:
- Breadth of Integrations ― Large companies need more integration than can currently be provided.
- Mistrust of New Technologies/New Ways of Doing Things ― You may be introducing a new technology or new/alternative way of doing things, and with newness and change will come distrust.
- Pricing Methodology ― You may have a value-based pricing system which should maximise your revenue. Perhaps your target market is not used to this pricing system. Educating your target market is vital and will take time. Do not underestimate just how long! Optimism can be your downfall! Educating your target market is vital and will take time. Do not underestimate just how long!
Contact Dr Thommie Burger, Founder of JTB Consulting, should you require further guidance on preparing for your next Investor Pitch.
Investor Questions #3: Who specifically do you sell to?
What They Mean
This is an investor question where you need to be clear and concise! The investor wants to know what role you are pitching at and at what level. Who are the decision-makers, and are you able to get to them? If you cannot talk to the decision-makers, it may mean that you do not hustle enough, do not have a network, or perhaps there is a general lack of interest in what you’re doing. Knowing who you’re pitching also affects the type of people you can hire.
What You Must Remember
Who are the decision-makers, and are you able to get to them? If you cannot talk to the decision-makers, it may mean that you do not hustle enough, do not have a network, or perhaps there is a general lack of interest in what you’re doing. Knowing who you’re pitching also has some implications on the type of people you can hire. Want more advice? Read our article entitled 7 Top Tips for Writing a Strategic Business Plan.
Investor Questions #4: Do your customer have a budget for this? How often do they have a specific budget for your product/service?
What They Mean
Investors are trying to find out how easy it will be to sell this product/service. If companies have an allocated budget for what you’re selling, it is far easier for them to be able to buy now; if they don’t, you may have to wait a whole year before the next budget is made, and allocation may be carved out. A longer sales cycle means a greater risk to your business model.
What You Must Remember
There’s no way of running from the truth, you either have a long sales cycle or not. Likewise, your customers either have a budget or not. What matters is that you understand this and how you will manage it to hit your targets.
Investor Questions #5: Why do people buy this?
What They Mean
A critical investor question. The investor wants to know what is amazing about your product/service and what compels your customers, and potential ones in future, to buy this rather than someone else’s. They care about why you are different now and why you will be the winner. This is an opportunity for you to detail the wondrous things about your company. You can also take the opportunity to provide customer feedback quotes, which will be positive.
What You Must Remember
This is a very open-ended question; therefore, you should provide a focused answer. Think about whom you are talking to. What do they want to hear? What do you want to tell them? Understand they may not know your industry, so this is your opportunity to educate them.
Questions from Investors #6: How long does it take for reps to ramp and become fully productive?
What They Mean
If you are a sales-driven business, you scale your business through more sales reps. Since it takes time for sales reps to be fully productive, you need to hire in advance of your targets to hit them.
What You Must Remember
Investors are trying to figure out how methodical you are and planning your business, whether you are currently above or below schedule, and what are the indications on costs? If your plans are aggressive, then how aggressive are you with hiring talent? There is also an element of churn in staff. If you have high churn and it takes a long time for staff to be productive, you may need to hire multiple people on the assumption that only some survive. Fundamentally this is a question of how well you understand your business and hit your goals, especially when you need a sales engine to ramp up.
Questions from Investors #7: What is your pipeline like?
What They Mean
A very important investor question. Do you have a load of clients about to come on board that gives your projections credibility? Investors would like you to be realistic and not use pie-in-the-sky financial projections.
What You Must Remember
Your pipeline is a leading indicator; it is also indicative of the numbers you’ll be hitting in the coming months/year. A strong pipeline is, of course, a positive thing. In my experience, investors who can’t get their head around the certainty of your pipeline and the realism of your projections may be a deal-breaker for you. Investors would like you to be realistic and not ‘thumb-suck your projections’.
Questions from Investors #8: What is your burn rate?
What They Mean
This means how much money are you spending per month?
What You Must Remember
Literally, how much cash are you burning a month? It is impressive if you’re achieving a lot with a small amount! If you have a huge burn rate, investors will wonder what the hell you are doing! There are natural implications of having a high burn rate, including how much you need to raise to stay alive.
Questions from Investors #9: What KPI are you focused on?
What They Mean
The KPI of your company will depend on the industry that you’re in and the stage of your evolution. Whilst everyone will have slightly different numbers they focus on, there are a lot of commonalities.
What You Must Remember
Focusing on esoteric numbers, aka the wrong ones, may raise questions. Listen to what they said. They have asked you what you are focused on. You are not to pull out a dashboard of 500 numbers. Give them the 4 to 6 key numbers that you are tracking. Examples of these could be sign-ups, revenue, growth rates, retention, and referral rates. You should know what these are, or you should not be raising funds and getting out of that meeting asap.
Your focus is really important. If you track several numbers and ratios, and you feel they are all important, don’t tell them that. Answer their question as to how you think they want to hear it. You’ll have to say what those KPIs are, so you better know the numbers and explain their evolution. You should know what these are, or you should not be raising funds and getting out of that meeting asap.
Questions from Investors #10: How can you reduce your break-even rate point up 6 months in your plan?
What They Mean
This the most devious question. You can’t answer if you don’t really know your model and all the drivers of your business.
What You Must Remember
Don’t just look at the investors after they ask the question and say, “Um, well, you know, duh, blah!” Do some quick, logical thinking. What are the key drivers of your business? It’s going to be around revenue, growth and cost, right? So what’s the derivation from those three points? List what they are, how they can change and what you would do if you had to move to profitability.
