Questions Every Investor Asks
BY Amanda Williams | May 15, 2020
Category : Education
By Amanda Williams, Strategy Lead, Next Chapter Raise
There is some truth that fundraising is a numbers game. Even with the best preparation, you will likely have to talk to dozens of potential funders in early fundraising rounds. No matter how good your pitch is, investors will still have questions, and with a bit of preparation, you can be ready for the most important ones.
Every investor, or loan officer, is fundamentally trying to assess the risk/reward tradeoff – how likely is it that I am going to get my money back – and how big is the likely reward for taking this bet.
Investing in a business does not have a foolproof risk/reward ratio. Investors will pore over your financials and sales data, but at the end of the day, whether or not to invest is a subjective decision about whether or not they believe your vision and your ability to execute that vision.
Every funder has their own criteria but most people will make their decision based on core business fundamentals:
- Market opportunity – Is this a market that they want to be in?
- Traction – How is your business doing now? (evidenced by sales, pilots, or customer feedback)
- Growth strategy – How do you plan to grow your business in order to give them a return on investment? Is that growth story backed up with solid financial projections?
Your pitch, deck or business plan should cover all of those, but investors will want to drill down into some of them to answer the question of whether or not they should believe in you. Here are five questions to expect, and how you should prepare to answer them:
What is your USP? (unique selling point)
You are not likely to be the first business trying to solve the particular problem you’re trying to solve. You may have sold them on the fact that there is a lucrative market for your product or service, but you need to convince them why they should choose you and not one of your competitors.
Explain to him what your business has that will make it succeed. Your USP or “x-factor” should be unique, specific and defensible. Most importantly, you need to believe it wholeheartedly or you will never convince them to believe it as well. If you don’t have unshakable faith in your USP, how can you convince someone to invest in you?
Keep your answer short, sharp and consistent. You can wobble when answering other questions, but not this one.
What is your exit strategy?
Selling your business might not be what you want to think about when you’re putting all of your energy into building it, but every potential investor or lender wants to know how they will get their money back. An exit event is often the most straightforward way for them to cash out.
This question is not really about you or your business, it’s about the investor. Even if you have no desire to sell your business because it’s been your lifelong dream, don’t tell them that!
To answer this question, come up with the most logical buyer of your business or another means for investors to cash in their shares. Again, be specific and include a timescale. “With this investment, we will expand into the US reaching 5% market share in 3 years, which will make us an attractive target for Competitor X”.
How do you justify your sales projections? The numbers question.
Nearly every pitch contains a hockey stick graph showing exponential sales growth. No investor actually believes these projections, but he or she will want to make sure that they are not purely fictitious.
Investors speak finance. They may not fully understand your technology or customer demographics, but they get finance. The most important thing is to answer with specific figures and financial terminology – respond in their language.
Include specific business fundamentals that justify the growth in your response. i.e. “By ordering in lots of 10,000, we will hit economies of scale, reducing production and shipping costs and resulting in an overall margin increase of 8%”.
If you’re in a large investor meeting with members of your team, do not pass this question over to your CFO. You as the CEO/founder need to come across as having a good handle on the financials, specifically a clear understanding of what drives profitability.
What is the investment for?
Again, investors are trying to assess the chances of getting their money back, so they want to make sure that their investment is spent on activities that will grow the business and increase profits.
Investment can be used for salary and operations, but in your answer, highlight spending on business growth expenditures.
Explain what you will spend it on and what impact each expenditure will have. For example, instead of saying “we’ll spend it on technology, stock and marketing”, try “$50,000 will allow us to open a pop-up store for 6 weeks and pay for Facebook ads to promote it. That will win us 1,000 new customers and $200,000 in sales”.
Investors may also be fishing for additional information with this question – they want to know when you need to raise again. They will try to ascertain how quickly the growth expenditures will turn into revenue and whether another cash injection will be required beforehand.
Additional raises are expected, but use your response to let them know that you already have a clear, long-term plan to grow your business. It is acceptable to talk about “back-up plans” as well. For example, “if we do not achieve revenue growth of X% by May, we will launch a second crowd-funding campaign to get revenue from pre-orders”. Investors want to see pragmatism as well as ambition to feel comfortable handing over their money.
This is why we stress planning a fundraising journey and not just individual rounds.
How much have you and your co-founders invested?
This is a question about both team dynamics and “skin in the game”. Investors want to work with committed entrepreneurs who are working hard to earn back their own money as well.
This question allows you to talk to “sweat equity” already invested in the business. It is a good opportunity to identify any top employees or advisors that might have small equity stakes – this demonstrates your advisors or employees’ belief in your business and confirms that there are additional people with a vested interest to make the company a success.
You should also talk to who has decision-making authority for the business. Hopefully you as founder/s still retain majority ownership, but if that is not the case, make sure that you have shareholder agreements in place to give you authority. Investors will not want to proceed through a complex negotiation if there is someone who can block it at the last minute.
All five questions – USP, Exit Strategy, Financial fundamentals, how you’ll spend it and “skin in the game” – are about providing comfort to potential funders. They want assurance that you will give them back their money in a few years, hopefully with significant upside. Use this to frame your responses – emphasise how you can prove that you will use their money responsibly and effectively, and get it back to them.
You want to inspire confidence with your responses:
- Focus on the specific impacts of your USP or growth activities, not technical details
- Use financial language and figures (accurately!)
- Be sharp and concise (practice with colleagues or advisors)
- Demonstrate your excitement and confidence in your business – you want them to “drink the Kool-Aid” too
- Be bold and ambitious in your growth plans, but back it up with solid projections
Finally, remember that you are entering into a long term relationship with funders. Make sure you prepare questions for them. You should understand their motivations, their timelines for returns and how they can add value beyond money.
If you are ready to take the next step in your fundraising journey, check out our new female founders’ platform, Next Chapter Raise. Interact with fellow entrepreneurs, get access to templates, masterclasses and group coaching, and learn about exclusive pitching and funding opportunities.