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September 5, 2012

Top 3 Questions Venture Capitalists Will Ask You

When the time comes that you have the opportunity to make your presentation to a venture capital firm, you need to be prepared. More to the point, you have to be able to address three things which every VC (and really, every investor) will want to know. These are things which you will need to cover in your presentation or during negotiations with venture capitalists, without fail.

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1. Exit strategy
This is the most important thing about your entire business plan, at least as far as a potential investor is concerned. Will your business be able to provide a return on their investment, preferably in the relatively short term? If the answer is no, they’re not going to invest. The most common exit strategies (also known as liquidity events) are buyouts or mergers by other companies or (although this is less common) an IPO. These aren’t the only possibilities, but they are the ones which venture capitalists like to see, since they provide the best chance of a healthy return on their investment.

Because this is their goal, venture capitalists prefer entrepreneurs whose goal is to build the company over the long term, since this speaks to their dedication to taking the business as far as it can go. While your primary focus should be on keeping your company growing, remember that your exit strategy is very important to potential investors. Exit strategies won’t present themselves until the company is doing well, so keep your focus on running your business and you’re more likely to make it to a liquidity event.

2. Value
This is often problematic for entrepreneurs and admittedly, it can be difficult to assess the true worth of your business. When investors ask, you need to be able to provide a well thought out, yet somewhat realistic figure. For example, if your business is still in the planning stages, it’s not going to be worth $100 million. At the same time, providing too small of a number will mean a less than ideal beginning point for negotiations or getting less funding than you need (or none at all – no one wants to invest in a business which has no value). Perhaps the best answer is that ultimately, the market will decide the value of your business. If venture capitalists are convinced that your venture has a good chance of being successful, it’s entirely possible that other VC firms will court your firm, making it more valuable to investors and giving you a better chance of raising more capital.

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3. Need
Knowing how much funding your business needs depends on knowing your business inside and out. You have to know what equipment you need and what it will cost, a reasonable estimate of what you’ll need to pay your lawyer and accountant as well as all of your other anticipated costs. Venture capitalists want to know how their money will be used and that it will be managed responsibly. You need to know your financial projections intimately and be able to speak about it in detail; you may even need to explain your financials line by line. One question you may be asked is how you’ll proceed if the venture capital firm provides only, say, 75% off the funding you’re asking for. If so, you need to have a detailed set of milestones for your business and how to use any infusion of capital to fuel the growth of your business. It’s a question which you should anticipate, since this could be critical to your ability to receive not only this initial round of funding, but any further rounds of funding your venture may need later on.

Peter

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