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July 14, 2006
Top 10 Things Investors Want To Know
We know that there are a lot of a:c euro readers that are having their first encounter with investors. So we've taken the Top 10 Questions Investors Asked Us list written by ParticleTree founder Chris Campbell and made some annotations to it.
For example: why do investors and VCs ask "who else have you spoken to" or why they want to know "who are your customers". All we've done below the jump is added some reasons why the moneymen (and women) ask those questions, plus shortened some of Campbell's comments.
Campbell is a freshly minted US-based entrepreneur and founder of a startup called ParticleTree who published the list in his company’s blog after a series of meetings with potential investors. It is written in the language of the founder and from his point of view, so we think it is more user-friendly than some of the lists that VCs have produced.
The Top 10 Questions Investors Asked Us
1) Who else have you spoken to?
"I think it’s because Silicon Valley is a lot like high school in that you’re basically as cool as the people who talk to you. Being funded by Sequoia, is not unlike dating the hottest cheerleader in the squad. Then again, maybe it’s just natural human curiosity. Either way, it’s a good idea to keep at the top of your head who you’ve talked to and their appropriate place in the pecking order."
[alarm:clock euro - Update: Take a look at alarm:clock euro reader Jennifer Carnegie comments below to get a more insightful commentary that what we've posted here. It is a quick way to understand if the deal is the right match for the VC in terms of stage, sector, and business focus. If another VC took the time to have a meeting with you, it also tells the investor you are currently talking to that there is a good chance it is a fundable venture. It tells the potential investor how long you've been fundraising, if there might end up being competition on the deal, and are there other VCs that could co-invest on this deal. Even if prior meetings with investors did not pan out it could also be helpful. For example, if it was “too early” or “too small a deal” for the other VCs, it might be just right for the current investor because he's just raised a new fund and is looking for early stage deals, for example.
2) How will you make money?
After one investor asked us this question, he quickly said under his breath in a little prayer : " Please don’t say Adsense". If you already have a million users, then the investors are going to listen to you no matter what you have planned.
[alarm:clock euro – The investor wants to know the business model, if there is already a path to profitability, and has the product achieved "traction" or customers and early adopters in the market.]
3) How will your company grow?
Investors want a return on their investment, and they naturally want to see you grow your market. Always good to have everyone on the same page about how things should pan out.
[alarm:clock euro - The investor is asking Is this business addressing a market big enough to make your company a sizable venture and will it cost a lot to grow the business. How would you go about getting big?]
4) What technologies do you use?
We’ve noticed that a lot of the investors are ex-programmers and enjoy showing off a little programming speak, but why they all care about this just stumps me.
[alarm:clock euro - The question is not really all about investors reliving their past lives as über geeks. They need to understand if the choices you have made are robust scalable - switching to another database supplier or programming language because the original one couldn't handle customer growth is something they want to avoid. If the target market is telecoms, is the underlying platform reliable enough. Are there costs associated with using the underlying technology. E.g if you are using one of Sun’s Java code components you might have to pay Sun a toll on every license sold. They also want to know if you are using standard technologies. A VC we know told us that although it happens “less often now”, but he has seen some startups that will develop their own programming language or database management system “because the existing ones are not optimised enough”. For a VC this is a red flag. ]
5) How easily can you be copied?
If you’re writing a web app, chances are there are a lot of other teams who could create a similar program (if you’ve got no competitors you might be working on the wrong thing). We tried to be as honest as possible when answering people.
[ alarm:clock euro – This is the “what are the barriers to entry” question VCs always ask. There are two things that this line of inquiry seeks to expose. a) how long would it take someone to copy your application or service and b) how long would it take them to replicate your success in the market.
Most investors will not be scared away from a deal if there is lots of competition, but they will then be looking for a demonstration that of market penetration and some proof that it is hard to copy that level of product acceptance. At least in some categories of technology, VCs will go for it.]
6) Can we see the demo?
Everyone in Silicon Valley has an idea, and many of them are similar. Investors want to see the goods. We had one investor invite us out to a casual dinner, and when we didn?t have our laptops with us, we ended up taking him to our messy apartment full of pizza boxes and soda cans because he wanted to see the demo then and there. We got a follow-up meeting and an offer out of it, so it's good to know that a working demo is more important than cleanliness. Basically, always assume they haven't seen your online public demo and have that localhost version on your laptop ready to go.
[alarm:clock euro - Many investors are wary of slideware - companies that only exist in powerpoint presentations. So being able to show a product running will go far with the investor crowd. But keep it short. One of our VC readers tells us that some companies tend to want to show too much and he warns of the "failing demo". A good point, we have seen too many demos go downhill, particularly in the mobilephone application category when founders fumble over a frozen phone, or start waving it in the air trying to "catch" a signal when they discover there is no network coverage in the meeting room.]
7) Who are your competitors and how are you better/different?
Unless you just invented a teleportation system, research your competitors and be ready to answer what you can do better than everyone else out there. Don?t even try and avoid this question because about two days after any meeting, you're going to receive an email asking you to detail how you?re better than 20 other companies the investor just Googled.
[alarm:clock euro - the VC speak translation is what is your unique selling point, differentiators, and market positioning. A Paris VC we know says that describing differentiators is going to inform him about why he should put bet on your venture rather than one of the 20 competitors. The two worst answers he says are: we do not have any competitors, or there is no real differentiator...]
8) Who are your customers?
The trick to this question is to be specific. You’ll want to have examples of who is using, who will use, and who wants to use your product. At Startup School, Ann Winblad from Hummer Winblad said they will even contact companies you mention as potential customers during the due diligence period to verify their legitimacy as a customer.
[alarm:clock euro - VCs will always contact customers during due diligence and if they don't, you have to wonder about their level of professionalism. Happy customers are key - a truism yes, but one that is often overlooked in the tech sector. Besides, investors are not the only ones that will be talking to your existing customers, other potential buyers, journalists, and market researchers will be consulting them too. ]
9) How will you spread the word about your product?
This was my favorite question, because we could usually nail it. Investors understand the power of word of mouth marketing, and you win bonus points if you can demonstrate the ability to quickly spread the word. One of our biggest selling points was the fact that we have a decent blog, we belong to the 9rules network, and we were able to reach over 50,000 unique people in a matter of days when we released our public interface demo.
[alarm:clock euro - The investor wants to understand the business development process. How the market will be approached - will the product be embedded into other things, or will partnerships with value added resellers be required – can viral marketing be used?]
10) What will your market penetration be?
This was actually only asked of us once, but I had to add it to emphasize that you don?t need to spew out a bunch of BS to impress investors. We could have made up something you probably heard in an MBA class, but instead just said, “We honestly don’t know.? And that’s the truth, because I can’t even begin to guess what percentage of the available form building market we are going to get. The investor was a little bit shocked with the answer, but it definitely wasn’t a deal breaker.
[alarm:clock euro – The investor wants an idea of what percentage of the market you are targeting your company could snag. Is it going for the lion’s share or the bits leftover? Is your startup a future global leader or is it a follower? One of our VC readers says that the worst answer is defining an unrealistically huge addressable market, and then saying that you can be a $100M company with 1% of that market.]
Posted on July 14, 2006 06:55 AM | Posted to entrepreneurship | Permalink
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