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3 Questions Venture Capitalists Will Ask You
Having finally made it to the presentation-stage with a venture capitalist is a step in the right direction for you and your business. However, apart from evaluating your presentation, venture capitalists will ask you critical questions and evaluate how you formulate your answers. Three key questions a venture capitalist will ask you are:
1) How much capital you need and why?
2) What is your valuation
3) What is your exit strategy
1) Amount of Capital
If you ask someone to give you money, often times they will ask you what you need it for and why. The same thing will happen when you ask a venture capitalist to write you a multi-million dollar check.
The key to answering this question is to know your business inside-out. It is important that you have full mastery of your projected financial model and that you understand how every funded dollar will be used in your business. In other words, you need a deep conceptual understanding of your entire business idea.
It is common for VCs to ask you what you would do with less money. So if you wanted to raise $2 million, they may ask what you would do if you only received $1 million. This will reveal your top priorities and which milestones you would accomplish with less.
2) The valuation of your firm
To some, this question may be considered a trick-question, as there is no right answer.
If a VC asks you during your presentation how much you believe your firm is worth, don't reply with hundreds of millions of dollars. He will think that you're unrealistic and not ready to handle the tough reality of start-ups.
If you understate the answer, he will think that something is wrong.
Even if you manage to give a fair estimate of your firm's value, it may come back to haunt you later in the actual rounds of raising capital. Giving out a fair value allows the VC to discount it and essentially limit your bargaining power when it comes to the actual funding.
Thus, the best answer is to tell the venture capitalist that you will let the market decide on your firm's value. If you assure them that your company is going to be a success, VC's will create the market on their own. Ideally, they will bid against each other and raise the value of your firm.
3) Your Exit Strategy
This question basically refers to how the VC will get his return on investment. Typically, an "exit" will happen if your firm gets acquired or has an IPO. Both of these are commonly listed exit strategies, although there are many more.
That being said, the best companies tend to have CEOs that are focused on building a successful company for the long run. Venture capitalists know this, and look for those leaders willing to put in hard work for years to come.
To this point, Dick Costolo, founder of FeedBurner (acquired by Google) has a great quote - "Make a map of how you want to grow the business, not a map of what you want to happen to the company."
His quote touches on the principle that successful companies will create their own exit opportunities as they grow. You should focus less on figuring out ways to exit your company, and instead build a great company with the ideas that you have.