Now that you have made it to the presentation stage with the venture capitalist, it is definitely the step in the right direction for both your business and you. Keep in mind, besides evaluating your overall presentation, venture capitalists are going to ask tough questions and then see how you answer them. You can be sure that a VC will ask you the following questions:
1) What kind of capital you need and why?
2) What is the extent of your valuation
3) What plan to you have for an exit strategy
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1) The Amount of Capital
Whenever you ask someone for money they want to know the reason you need it and what it is for. This is the same for a venture capitalist, they want questions answered before they write out a million dollar check.
The best way to answer this question is you have to know your business, every inch of it, inside and out. You must have a full grasp on your projected financial models and make sure you understand and can relay how each dollar funded is going to be used in your business. To put it simply, you need the deepest understanding of your business idea.
It is not uncommon for VC’s to ask you how you would handle receiving less money. Therefore, if your goal is to raise $2 million, you may be asked what you would do if you only raised half of this amount. This tells the investors you priorities and what you can accomplish with having less.
2) Your Firm’s Valuation
This is often thought of as a trick-question because there is not truly a right answer.
Do not reply that your company is worth millions of dollars if a VC happens to ask you what your company is worth during your presentation. He or she will assume you are being unrealistic and cannot handle the tough reality of a startup.
On the other hand, if you understate your answer, than he or she will assume something is not right.
Even though you may give a good estimate of your company’s worth, it can later come back to bite you when you make the rounds in trying to raise capital. However, giving a fair value of your firm helps a VC to discount it and that can essentially reduce the power to bargain when you get to the actual funding.
Therefore, the best way to answer is to explain to the VC that you need to let the actual market decide on your firm’s value. When you assure them that your firm will be successful the VC’s can then create the market themselves. Preferably, they will bid against one another, which ultimately raises your firm’s value.
3) What’s Your Exit Strategy?
This question has to do with how the VC’s will get a return on their investment. Normally, an “exit” will take place in the event your company is acquired or if it has an IPO. These are both listed as common exit strategies, but there are others as well.
Even with this, the best firms have CEO’s that have a focus and goal to build a successful company and be in business for the long run. Venture capitalists understand this, and they look for those leaders that are willing to put in the years of hard work it takes.
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The founder of FeedBurner (now owned by Google), Dick Costolo, sums it up this way – “Create a map of the way you want your business to grow, do not make a map of what you want to happen to the firm.”
This quote hits on the principle that a successful company creates their own exit opportunities when and as they grow. You need to focus more on building a successful company rather than way to exit.