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Understanding the questions behind a VC’s questions: Part 3 — How long will we be climbing?
How are we going to take this hill? How will you know when it is time to go to plan B?”
Investors will usually ask what you believe it will take for the business to achieve the transitions from revenue generating to cash flow positive to monthly, quarterly and annual profitability and the key development milestones along the way. The actual outcome has a significant impact on the type of investment the fund is making, but your sense of the road ahead is the most valuable piece of information. It is impossible to predict with much accuracy so understanding the team’s approach to discovering the optimal path for the business (i.e. is it lean start-up?) is the goal of these questions in an early stage meeting.
When learning about a new business, questions about the business model and the market should really illuminate the entrepreneur’s approach to learning about the market and the customer and adjusting to create product/market fit. The projected period between funding and revenue and the associated product milestones can reveal the emphasis being placed on market feedback and iteration as well as the ability to identify appropriate pivot points. As most start-up successes come from the pivot, not the blueprint that was funded, clarity around the process for discovering market fit and potential revenue models is key to evaluating the risk in an investment.
As you answer the questions below, imagine crossing a river with your investment partner by jumping rock to rock. With each question, he is trying to judge the distance to the next rock and decide if the team can make it without falling in the water. He is also trying to see how you choose your path and how you learn from your previous choices.
WHAT STAGE OF DEVELOPMENT ARE YOU AT?
- What is your stage of development? Technology/product? Team? Financial metrics/revenue?
- What has been the progress to date (make reality and future clear)?
- What are your future milestones?
WHO IS YOUR CUSTOMER?
- Who are your existing customers?
- Who is your target customer?
- What defines an “ideal” customer prospect?
- Who actually writes you the check?
- Use specific customer examples where possible
HOW ARE YOU SELLING?
- What does the sales process look like and how long is the sales cycle?
- How will you reach the target customer? What does it cost to “acquire” a customer?
- What is your sales, marketing and distribution strategy?
- What is the current sales pipeline?
In part 4, I plan to talk about identifying the opportunity size. This is where the investment conversation typically starts.