WHAT QUESTIONS DO INVESTORS ASK DURING DUE DILIGENCE?

What questions do investors ask during due diligence?

Entrepreneurs need to be prepared before pitching to a VC. They can do this by anticipating questions and having reasonable and thoughtful responses ready. The more you are prepared, the more your odds for success.

These are some of the questions we commonly ask entrepreneurs when we speak to them for the first time 

 

Pitching is daunting. For experienced and inexperienced investors alike!

Most of the confusion and fear arises due to the fact that the fundraising process is opaque and tilted towards the VCs. Founders are bound to feel left out in the process.

We value transparency and clarity in communication and also like to make the founders' lives better.

 

In this post, we will highlight the most common questions asked by VCs to founders during the fundraising process. Preparation is the key to success.

 

What is the background of the founding team?

 

Early-stage startups are more about the potential of the founding team rather than the idea because it is the execution that matters. The background, experience, and ability of the founding team is paramount to the success of the startup.

  1. Who are the founders?
  2. What is your background and experience?
  3. What domain expertise do you have?
  4. What role does each founder play in the team?
  5. Are there any key additions required in the short, medium-term?
  6. Why is this team the right one to execute?
  7. How many employees currently work in the company?
  8. Do you have an ESOP pool? Plans?
  9. What are plans to scale hiring in the coming 12-18 months?
  10. What is the endgame of the founders?

 

How big is the market opportunity?

Most investors look for a large market opportunity- because profits maximize at scale. As a founder it is your responsibility to convey either in numbers or in a narrative about the scale of market opportunity available to your startup.

  1. What is the target market?
  2. How will you reach your target market? What is your go-to market strategy?
  3. How will you gain market share over time?
  4. Why and how will you be able to retain your market?

 

Product or Service

Investors expect founders to articulate the features of their product or service. They need to explain the following-

  1. Why will users like or use your product/service?
  2. What value is your product or service adding to users?
  3. Where is the product/service in terms of development at present?
  4. What are milestones in product development?
  5. Can you describe some key features of your product/service?
  6. What have been the learnings in product development along the way?
  7. How is your product/service better than what it was at first?
  8. What incremental features are you planning to add and in what time frames?

 

Competition

Every company has some or the other competition. Any founder that says we do not have competition is going to lose credibility.

  1. Who is your competition?
  2. What is your differentiation strategy?
  3. What are your competitors' strengths and weaknesses?
  4. What advantage does your competition enjoy over you?
  5. How would you rate your competition from 1-5?
  6. How would your competition rate you from 1-5?
  7. What are the barriers to entry for a new entrant?
  8. What explains your dominance over competition?

 

What traction do you have at present?

One of the most important factors for an angel investor is finding signs of traction or early customers.

  1. What early traction do you enjoy?
  2. Results of the initial pilot?
  3. Any big-name customers?
  4. Any strategic partnerships?
  5. Customer feedback and testimonials?
  6. How can this traction be accelerated?
  7. Do you have any unpaid press coverage?
  8. What key metrics do you track internally?

 

Marketing and customer acquisition

Investors want to understand your strategy to market your product/service and acquire customers-

  1. What marketing or customer acquisition strategies are being undertaken?
  2. What different channels are you using to acquire customers?
  3. Which channels are the best performing and why?
  4. Is it a push or a pull strategy?
  5. Depending on the product, is there a repeat sales cycle possible?
  6. Who makes the purchase decision vs Who is the end-user?
  7. What is the cost of customer acquisition?
  8. What is customer lifetime value?
  9. What is the typical sales cycle between initial pitch and closing of sale

 

Scaling and unit economics

Scaling is very important because scale brings sustainability which creates value for investors. 

  1. What is your revenue model? How will it evolve over time?
  2. What is your unit economics? What will look like in a steady-state?
  3. What are margins? Gross, Contribution, EBITDA, cash burn
  4. What are the fixed costs for this business and how will they grow over time?
  5. What are the key underlying assumptions for medium-term growth?

 

Current funding round and any subsequent rounds

Investors want to understand where you are right now, and how much money do you need to go where you want to.

  1. Why are you currently raising capital?
  2. How much capital do you require?
  3. What is your cap table at present?
  4. How much are you looking to dilute to raise capital?
  5. What are your current commitments from investors?
  6. What is your utilization plan?
  7. What are your top 3 goals with the current capital raise?
  8. Can you share your financial projections pre and post fundraise for the coming 12-24 months?
  9. When will you need to raise capital next? How much?

 

Risks

There are risks in every business. Answer questions pertaining to risks in a thoughtful manner to show your awareness-

  1. What are the key risks your business, industry faces?
  2. What are any legal, statutory, liability risks that you face?

 

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