Entrepreneurs tend to spend a lot of time and energy trying to get noticed by venture capitalists and angel investors. However, reaching the point where an investor is interested is only a small part of the struggle to obtain funding. Once investors are interested, startup founders need to make the right impression to get them to sign on the dotted line. Making a great impression involves making an engaging presentation about the product and demonstrating expertise in the field. Venture capitalists and angel investors are not going to give money to people who do not know what they are doing, so they will typically ask a number of hard questions to gauge an entrepreneur’s knowledge of the industry and the market. Some questions that entrepreneurs may hear include:
- What mistakes have you made, and what have you learned from them?
Investors do not expect entrepreneurs to be perfect, but they do expect them to learn from the missteps they have made and to grow stronger as a result. While failure is necessary for growth, it is also important that entrepreneurs have the right mindset. In the end, failure is a learning opportunity, since knowing what doesn’t work is every bit as important as knowing what does. Entrepreneurs need to own up to their failures and understand how to talk about them in a meaningful way. Investors want people with perseverance, which can be demonstrated by their ability to bounce back from failure with even more energy and excitement than they previously had.
- How will you react if the investment team decides that you are no longer the right person to continue running the company?
This question can blindside entrepreneurs who have not thought critically about what it means to obtain funding from investors. Giving away equity means that individuals can sometimes get pushed out of their own company. In the end, investors will give money to people who are more committed to the idea than their own ego. Entrepreneurs need to demonstrate that they have an understanding of both their strengths and weaknesses, as well as the good sense to step aside when they are no longer the most appropriate individuals to run the company.
- What do you use to track market trends?
In order to succeed in a market, entrepreneurs need to stay on top of the trends impacting it. Investors want to know that an entrepreneur is invested enough in the success of a company to have a robust method of not only tracking trends, but also staying ahead of them in order to maintain a competitive advantage. In most modern markets, things change very quickly, and startups need to demonstrate that they are ready to shift their products and services to meet these needs. Companies that have no mechanism for recognizing shifting trends and changing with them have little chance of succeeding in the long term.
- Which entrepreneurs have you found to be the most inspirational?
This question can confuse entrepreneurs, since it has no explicit bearing on the idea being discussed. However, the answer to this question can provide a great deal of information to potential investors. Entrepreneurs’ ability to name specific individuals off the top of their heads shows that they have spent time thinking about the entrepreneurial process and investigating best practices. Moreover, the specific individuals mentioned could tell potential investors a lot about what matters most to the entrepreneur and the kind of leadership that he or she takes at the startup. In general, people emulate those individuals whom they find to be inspirational, so it can give investors a good idea of how the entrepreneur will act.
- How will this business impact the current market?
This question is likely more in line with what entrepreneurs expect, but it asks more than it lets on initially. At its heart, this question asks about innovation. Investors are looking for products with the potential to revolutionize the market or at least significantly change the landscape. Given the large amount of competition in the business world today, products that do not promise significant change do not have much chance of success. The other issue addressed by this question involves passion. How passionate is the entrepreneur about the product? If an entrepreneur does not get excited about it, then why should anyone else?
- What tactics are in place to scale the product or service?
Too often, entrepreneurs forget to think about how they will scale their products and services as a startup grows. This issue is of central importance to investors, who seek out those companies with the most growth potential. The answer to this question should be as concrete as possible, and it should point to the exact mechanisms that can help an organization to grow while maintaining quality and a high level of service.
- Which exit scenarios are most likely for the company?
Similar to the last question, this one asks how investors should expect to make money off of the deal. The most common exit scenarios are an initial public offering and an acquisition. Entrepreneurs should think about both of these scenarios because they can affect how a company expands in the future and the types of products that it develops. Venture capitalists and angel investors will be interested because this is how the investment becomes monetized. Investors will have a better sense of the risk involved if they know the eventual exit goal. Entrepreneurs, in turn, should have some specific thoughts about aspects such as the timeline, valuation, and potential purchasers.