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January 21, 2011

Prepare for the 3 Questions Venture Capitalists Will Ask

When you make it to the presentation stage with a potential venture capitalist, you’ve definitely made a step in the right direction for your company. In addition to evaluation your presentation, a venture capitalist will surely ask you a few critical questions in order to evaluate how well you formulate your answers. The 3 critical questions a venture capitalist will likely as are as follows:

Click here to watch a great presentation about getting the attention of Venture Capitalists <==== 1) Exactly how much capital do you need and why?

Anytime you ask someone for money, they are going to ask you why you need it. This is exactly what is going to happen if you ask a venture capitalist to write a multi-million dollar check.

In order to answer this question, you should know every aspect of your business. You should know it inside and out. You should have complete mastery of your projected financial model and have a clear understanding of how every funded dollar is going to be used. Basically, you need to have a deep conceptual understanding of your entire business idea.

At this point, a venture capitalist might ask what you could do with less money. For example, if you’re trying to raise $3 million, they might ask what you would do if they only funded $1.5 million. This gives them a clear idea of what your top priorities are and which milestones you could accomplish with less capital.

2) What is your valuation?

Some people consider this question to be a trick question because there is no right answer.

If you are doing your presentation and a venture capitalist asks you how much you think your company is worth, don’t reply that it’s worth hundreds of millions of dollars. He is probably going to think you’re being unrealistic and might conclude that you’re not ready to handle the harsh realities of a start up.

On the other hand, if you understate the answer, he may think that something isn’t right.

Even if you somehow manage to give a reasonable estimate of your company’s value, it still might come back to haunt you in later capital raising rounds. Providing a fair value will allow the venture capitalist to discount the value, essentially limiting your bargaining power in regards to actual funding.

Therefore, the best way to answer this question is to tell him that you’ll let the market decide the value of your company. If you can assure them that your company will be successful, VC’s will create the market on their own. Ideally, venture capitalists will start bidding against each other, raising your company’s value.

3) Can you explain your exit strategy?

When this question is asked, a venture capitalist is referring to how he will receive his return on the investment. Typically, an “exit” occurs if the company is acquired or has an IPO. While both of these exit strategies are commonly listed, there are many more possibilities.

With that being said, venture capitalists know that the most successful companies usually have CEOs that are focused on building a successful company, not matter how long it takes. Venture capitalists are looking for leaders that are willing to put in years of hard work to achieve their goal.

Watch a great presentation about how to Raise Venture Capital <==== On this point, the founder of FeedBurner, Dick Costolo made a great comment. He said, “Make a map of how you want to grow the business, not a map of what you want to happen to the company.” This quote touches on the principle that most successful companies create their exit opportunities as they continue to grow. Rather than focusing on how to exit your company, spend your time putting your ideas to work and building a great company.


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