Hi, I'm David. Today, we are going to talk about something incredibly important for every startup founder: the 10 most crucial questions a potential investor will definitely ask you.
This blog post is for those who are just starting their journey to achieve product-market fit, as well as for those considering investing in startups. It contains some absolutely fundamental questions you need to know the answers to when building or investing in a startup.
We will focus on key elements important to both sides: the startup companies themselves and potential investors. Additionally, whether you need an investor or plan to be your own investor by bootstrapping—funding it yourself—the answers to these questions will be crucial for you.
In this article, we’ll discuss:
12 crucial questions that investors typically ask startups, providing insights and sample answers for each.
It covers essential topics such as the problem being solved, the business model, competitive advantage, key team members, market opportunity, and financial projections.
The article emphasizes the importance of understanding market size and opportunity, identifying risks and returns for investors, and having a clear plan for using investment funds.
Key Takeaways
Preparation is Key to Securing Investment Founders must anticipate and prepare for critical questions from investors, including those about their business model, target market, competitive advantage, financial projections, and risk management. Clear, concise, and well-researched answers demonstrate the viability of the startup and the founder's readiness for growth.
Understanding Risks and Offering Mitigation Strategies Addressing potential risks, such as market, competitive, or regulatory challenges, while presenting clear mitigation plans, reassures investors about the startup's preparedness. Coupled with realistic projections of returns and exit opportunities, this demonstrates a balanced and strategic approach to growth.
Demonstrating Traction Builds Credibility Sharing tangible achievements, such as user acquisition, transaction volume, or prior successes by the founding team, showcases progress and reduces perceived risk. Proven traction validates the startup's concept and boosts investor confidence in its growth potential.
What Do INVESTORS Want to Know? - 10 question
Question 1: What problem are you solving?
Let’s begin with the basics. Investors want to know if your product or service really makes sense. Remember the story of Airbnb? When Brian Chesky and Joe Gebbia started, they noticed a problem with the lack of available accommodations during big conferences. Their solution? A platform that allows renting rooms from local residents.
A sample answer for this question could be:
We are solving the problem of long waiting times for taxis during peak hours by offering an app that connects passengers directly with nearby drivers.
Question 2: What is your solution?
The description of your product or service must be clear. Imagine you are Steve Jobs presenting the first iPhone: simplicity and clarity. Investors expect a concise, easy-to-understand explanation, much like Steve Jobs’ iconic presentations.
A sample answer could be:
We have created a mobile app that allows users to order meals from local restaurants with doorstep delivery in less than 30 minutes.
Question 3: Who is your target customer?
Knowing your target group is key. The target group often defines the channels to reach them, meaning how they make purchasing decisions. Spotify knew that young people wanted easy access to music without buying it.
A sample answer could be:
Our customers are young professionals in big cities who value convenience and quick access to transportation services.
Question 4: What is your business model?
Investors want to know how you plan to make money. Netflix moved from a DVD subscription model to streaming, revolutionizing the market.
A sample answer could be:
We earn from commissions on every transaction made through our platform and optional premium subscriptions with additional features.
Question 5: Who are your competitors?
There is no market without competition. Facebook had to face Myspace and other social media platforms.
A simple answer could be:
Our main competitors are traditional taxi companies, such as XYZ, and other ride-sharing apps. However, we stand out with better customer service and lower prices.
Question 6: What is your competitive advantage?
Your unique value proposition is what attracts investors. Tesla isn’t the only electric car manufacturer, but their battery technology and design are exceptional.
A sample answer could be:
We offer an intelligent algorithm that optimizes drivers’ routes, reducing delivery time by 20% compared to the competition.
Question 7: What are your achievements so far?
Traction proves that your idea works, or you had previous achievements in the startup area. For instance, a good exit. Snapchat gained millions of users in a short time thanks to its unique approach to communication.
Some founders gain funding because of their previous achievements (e.g., Elon Musk).
A sample answer could be:
In the last six months, we have gained 50,000 active users and completed 100,000 transactions.
Question 8: Who are your key team members?
People are the key to success. Google isn’t just about Page and Brin but the whole team of outstanding engineers.
A sample answer could be:
Our team consists of experienced specialists from the tech industry, including our CTO, who previously worked at Amazon.
Explain that your team is exceptional, not just a random group of people without relevant achievements.
Question 9: What are your financial projections?
Investors want to know when they will see a return on investment. Amazon reinvested profits for many years but had a clear vision of the future.
A simple answer could be:
We forecast revenue growth of 200% over the next two years, achieving profitability in the third year of operation.
Question 10: How do you plan to use investment funds?
Specific plans for spending the funds show that you are prepared. Uber used funds for global expansion.
A sample answer could be:
We will allocate the funds to technology development, hiring key employees, and marketing activities in new regions.
Another Question: What is the market opportunity and size?
When evaluating a startup, venture capitalists want to understand the market opportunity and size to determine the potential for growth and returns on investment. A large market opportunity can indicate a significant potential for revenue growth, while a small market opportunity may limit the startup’s ability to scale.
A sample answer could be:
Our product targets a total addressable market (TAM) of $10 billion, with a serviceable available market (SAM) of $5 billion and a serviceable obtainable market (SOM) of $2 billion. Our solution addresses a critical pain point in the market by providing a more efficient and cost-effective alternative to existing solutions. We plan to capture a significant share of the market by leveraging our unique value proposition and executing a robust go-to-market strategy.
Another Question: What are the risks and returns for investors?
Investors want to understand the risks and returns associated with investing in a startup. This includes understanding the potential risks, such as market risks, competitive risks, and regulatory risks, as well as the potential returns, such as revenue growth, profitability, and exit opportunities.
A sample answer could be:
The potential risks associated with our startup include market risks, such as changes in consumer preferences, competitive risks from new entrants, and regulatory risks related to industry compliance. To mitigate these risks, we have developed a comprehensive risk management strategy that includes market research, competitive analysis, and regulatory compliance measures. The potential returns on investment for our startup include projected revenue growth of 150% year-over-year, achieving profitability within three years, and potential exit opportunities through acquisition or IPO. Key metrics to measure our success include customer acquisition costs, revenue growth, and market share.”
Conclusion
In conclusion, understanding the questions investors ask startups is crucial for any founder seeking venture capital or private equity investments. These questions delve into various aspects of your business, from your market opportunity and competitive advantage to your financial projections and the key team members driving your company forward. By preparing well-thought-out answers, you demonstrate to potential investors that your startup is not only viable but also positioned for growth and success.
These insights can help you refine your pitch and attract the right investors.
As you seek to raise capital, remember that potential investors are looking for compelling business models and a team uniquely capable of executing the company's business plan. They want to see a clear path to profitability and an understanding of the principal risks involved. With the right preparation, you can confidently navigate investor meetings and secure the funding needed to bring your vision to life.
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