During the course of a fundraise, founders are likely to encounter a few questions from VC’s that seem awkward or even a bit unfair. These are questions that usually don’t have anything to do with the business itself, but center around the dynamics of the round or maybe the motivations of the founders. Below are the most common flavors of these questions. For each, I’ll share some commentary on what investors are trying to uncover and talk how to handle them.
1. Where are you in your process?
This question is asked to try to figure out how much to prioritize the opportunity relative to the rest of an investor’s pipeline. Most investors have a process that takes a certain amount of time, but can get all hands on deck and cut that timeline in half or more if they know that they have to make a decision quickly.
If you have a term sheet in hand or know for a fact that you are about to get one, you can be pretty transparent and say that you are late in the process and are looking to make a decision by X date.
If you don’t have a term sheet, my general approach is to communicate that you are early in the process. Most investors want to feel like they are in the first wave of investors that you are speaking with. If not, that can suggest that your fundraise hasn’t been getting much traction or that you are prioritizing some other investors that you like better.
That said, you don’t want investors to feel like it’s so early in the process that they can take their sweet time. I notice some founders (from YC in particular) have been trained to say something like: “we are just starting the process, but things are moving faster than we expect and we are already scheduling follow-up conversations and partner meetings.”. I wouldn’t necessarily follow that same script, but the sentiment that this communicates is pretty strong.
Some founders lay out a specific time frame for when they hope to get the round closed. Something like “we are just getting started, and want to make a decision by X date”. I generally only like this approach if you have lots of options. Either you already have a funding offer from another investor, or you are profitable and don’t need the money, or you have tons of cash in the bank and are only entertaining investors because of inbound interest. In these cases, laying out a specific timeline can be effective, but be mindful that investors do pay attention if dates change and will notice if timelines slip.
2. What are your pricing expectations?
This question helps an investor assess a deal’s level of competitiveness as well as the likelihood that it falls into a zone that the investor would consider reasonable. Sometimes, investors might get at this in more indirect ways like commenting about other financing rounds or casually throwing out a number and watching your reaction. In general, I think it isn’t in the founder’s best interest to be too forthcoming with these sorts of questions. No VC is really asking founders for their guidance on how to price an investment. So throwing out almost any number will be neutral at best and probably hurt you.
The response I’d generally recommend is something like “Our priorities are to partner with the right long term investor at a price that is fair in this market.” If an investor throws out a legitimate price and asks you to react to it, I think you generally want to say that it’s lower than the other feedback you’ve heard, but if that’s what they think is market, you are open to considering it in the context of the other deal terms.
The goal during the fundraise is to get firm offers from investors at prices they deem to be fair. Until you have a term sheet or two, it doesn’t make sense to close any doors, since the more people that you can bring to the table, the more leverage you have to drive an acceptable deal with the best potential partner. Also, I find that the best investors are usually not the highest bidder, so coming in too aggressively around pricing expectations may cause you to eliminate your best potential investor because they don’t want to overpay.
3. What are your existing investors going to do in this round?
Investors ask this sort of question for two reasons. One, is to fish for weakness. If for some reason an existing investor that would normally follow-on in this situation isn’t participating, there is usually a longer story that the new investor wants to know about. The other is to make sure that the round dynamics are such that the new investor is going to be able to get an acceptable level of ownership in the new round.
The tricky part of this discussion is that existing investors often aren’t that crisp about what they want to do in the new round. Most existing investors would want to know who the new lead investor is and what price they are proposing before giving a specific answer about their desired allocation.
My recommendation is to just figure out ahead of time whether your existing investors will be writing a check assuming a new outside lead. You don’t need to get them to commit to a specific number, but most of your investors can tell you if they are going to write a check, and if they are looking to do way more or way less than their pro rata amount.
If one of your larger investors wants to do way more than their pro-rata, this could create issues around a new investor getting their desired ownership. This is something you should figure out, and will be the subject of a future post. If for some reason one of your major investors is not going to be investing moving forward, that probably will take some explaining, and will be the subject of a future post as well.
4. What are your goals for this business?
Not that many VCs ask this question specifically, but a lot of investors are trying to get cues about how a founder is thinking about building their company. Are they likely to sell relatively quickly at a good, but not great, price? Are they going to try to raise lots of money as quickly as possible? Are they going to prioritize profitability or growth? Etc.
These questions are all about alignment. The investor is trying to figure out whether there is likely to be a mismatch in expectations down the road around growth rate, burn rate, or the ultimate exit. From a founder’s perspective, finding this right alignment is super important too, and so there should be a balance struck between answering in a way that maximizes optionality, and having a candid conversation on this topic.
Generally, I think that founders should make it absolutely clear that they are building a company that they think has long term potential to be of significant scale – at least hundreds of millions of dollars of enterprise value if not in the billions. Also, you should make it clear that you are shooting to achieve the full potential of the business, and are not interested in a quick flip. If this is not something you are comfortable pitching, you should not be approaching venture capitalists because your expectations will be misaligned.
Beyond the question of the ultimate potential of your business, different investors will have different points of view on some of the other elements of company building. Some investors will be more comfortable being aggressive about burn, others will be more focused on profitability. Some investors would love it if you never raise capital again, some will expect that if things go well, you ought to be raising again in six months. I think engaging investors on these topics in the interest of finding the right fit is fine. But I’d recommend holding your cards a little close to your chest, at least initially, in the interest of maximizing options prior to committing to any one investor.
Hopefully, this helps address the most common tricky questions that founders tend to encounter during a fundraise. This isn’t comprehensive, but are the types of things that I think come up over and over again that experienced fundraisers tend to handle easily, but less experienced fundraisers tend to stumble on. If there are a few others questions that you’ve heard that I haven’t addressed, please Tweet me, and I’ll try to follow-up in a future post or on twitter thread.