3 Questions that Determine if Investors Will Fund You
Last week, I had the privilege of witnessing 4 investors from established VC funds (i.e. Lightspeed, Canvas Ventures, Maveron and betaworks) grill startup founders on their “life work” at a Shark Tank for Immersive Tech (organized by Don Stein and Jacob Mullins).
One of the investors (I believe it was Aaron Batalion) couldn’t stand it anymore and quickly outlined the 3 most important questions on the investors’ minds when you pitch:
1) What do you do?
Investors see hundreds of pitches a year. They want succinct founders, not wishy washy answers.
And what’s more, the shorter your presentation, the exponentially more difficult it is to deliver. This quote from President Woodrow Wilson sums it up best:
If I am to speak ten minutes, I need a week for preparation; if fifteen minutes, three days; if half an hour, two days; if an hour, I am ready now. — President Woodrow Wilson
You don’t want to be in the situation where investors have to repeatedly ask, “so which part of <the thing that was described> do you do?” If you’re in disbelief that people struggle to describe their businesses concisely, try describing your business in 5 words or less to a random person on the street.
If you can’t sum up what you do 3 to 5 words then you’ve got some work ahead of you.
2) What do you do it for?
Know your benefit.
At Y Combinator we had an analogy, if your customer is in the middle of the desert with his arm trapped under a boulder and you came along with a glass of muddy water, that customer would give up anything for your water no matter how muddy.
In business, if your product solves a burning need, then customers will use it no matter how crappy it is.
Typically, for SaaS businesses these are products that either help customers save lots of money or become filthy rich. (Consumer products are usually much harder to define though.)
Regardless, don’t fall into the trap of “build first, find customers later”. When possible, you should always sell before building!
3) How much do they pay?
What’s worse than knowing your numbers are bad?
Answer: NOT knowing your numbers!
“Know your numbers” is a fundamental precept of business. — Bill Gates
Even if your numbers are bad, knowing your number is like a burning ship. Not knowing is like a burning ship with holes in the hull.
Many founders are either reluctant to share their progress with investors or unaware of how their business is doing. If you’re not tracking your money, then how confident will investors be with you tracking their money?
Some other questions that you should be prepared for are: How much will you charge customers? What’s the margin on your product? What’s the size of your market? Even if you don’t know the exact answer, having something prepared with logic to it shows that you’re thinking about it.
My tip here are to figure out the core analytics that matters most about your business and focus on growing that. (For consumer products it’s typically MAU and for SaaS products it’s usually sales.) The analytics good investors ask for are the ones that show that your business has long term potential.
Summary — 3 Most Important Questions on the investors’ minds
- What do you do?
- What do you do it for?
- How much do they pay?
At Y Combinator’s Demo Day, we were given 150-seconds to pitch our entire business (while competing against over a hundred other startups). The key is to be concise or no one will remember what you do.