Questions VCs Ask
WRITTEN BY: UPSIDE PARTNERSHIP
To help ensure that we are thoughtful about the commitments we make at Upside Partnership, we created a Seed Stage Investment Decision Checklist. For us to make an investment, not every question has to be answered affirmatively. This list allows us to proactively identify the risks in a company, and be self-aware of the blind spots in our decision. Very purposefully, the checklist is not a litany of metrics that a company must achieve in order to raise a round, rather it is a tool to invite both imaginative and critical thinking. This checklist is neither perfect nor exhaustive, but a good look into how a seed investor approaches investment decisions.
Seed Stage Questions
Market
What is the market?
What is changing in the market that creates this opportunity?
What is not changing in the market that sustains this opportunity?
Product
What is the product?
Is it first? Is it different?
How will it reduce friction?
Customer references
Team
How are they purpose built for the opportunity?
What are their blind spots?
What are the key hires?
Can they recruit?
What insights do they offer to other members of Upside Partnership?
Founder references
Risks
What are the identified risks?
What are the key risks?
What mitigates these risks?
How can the downside be minimized?
Investment Risk vs. Fundamental Risk
Upside Partnership Questions
What do you need to believe for this to be one of the 10 companies that matter?
What do we not know?
What is the return the fund exit (RTFE)?*
Follow-on Specific
What do you know now, that you didn’t know at the time of the initial investment?
Knowing what you know now, would you have made the original investment?
Why?
Are you being blinded by commitment bias?
Several other investors have shared their own questions and thought processes around fundraising. On his blog, Elad Gil shares a list of questions that apply to Series A fundraising. He states that founders should be prepared to answer the questions that follow below.
Series A Questions
Team
Who is your team?
Who are the 2-3 key hires you need to make for the company?
How do you plan to scale the team in the next year?
Why is your team uniquely qualified to solve this problem? What unique insight do you have?
Market & Business Model
What is the big opportunity you are addressing? What are the steps to getting there?
What is your business model? How will you make money? How big of a market is your specific market really (i.e. the market or customers from which you will extract direct value, not “Local is huge, and we are in local, so of course we will be huge”)?
Who is the competition? Why will you beat them?
Why are you uniquely positioned to win in the market?
What is the market structure and dynamics? How do these dynamics map against your strategy?
What are you doing that is different?
What are your customer unit economics (CPA, churn, LTV)?
If you are working in e.g. financial services, music, or the like you will be asked about legal or regulatory risk.
Product
What problem are you solving?
Why do users care?
How is this better than what is out there? How big of a difference is this really?
What are your major product milestones that are coming?
What are the 2-3 key things your product lacks?
What have you learned from the early version of the product?
Product demo - show me a demo
Product traction. What are the key metrics of use of the product? How have the numbers been changing recently?
Distribution
How are you going to distribute the product? How are you going to acquire customers? Is this an SEO, SEM, viral, radio ads, direct mail, PR, other based business?
Some may ask about per customer acquisition costs and ARPU
What advantage if any do you have for distribution?
How has distribution worked so far? What has worked/not worked?
What do you plan to do next for distribution?
Fundraise and financials
What milestone will the capital get you to?
Why do you need to raise money? How much money do you really need? Why don’t you need less (or more – another key items to think about)
How much dilution will you give up? What is your pre-money target range?
What will you use the capital you are raising for?
What are your basic financial projections?
End game
Why can this be a billion dollar business?
Pete Flint at NFX created a Series A checklist in which he outlines 13 proof points investors look for when considering an investment. We have outlined them below with some of his notes. You can read more in Pete’s original post here.
Show Traction: “Investors looking to see if you have traction are looking for that hockey stick curve. A more linear trajectory isn’t as appealing, they want to see you approaching an inflection point. When they invest, they want to see their investment as rocket fuel.”
Demonstrate Product-Market Fit: “This is where you can look to data to show that the market is starting to adopt your product. Being diligent about that data is critically important not just to show you have product-market fit, but also in cultivating and showing that you’re data-driven as an organization.”
Prove Scalability & Unit Economics: “For scale, a minimum scale that investors are looking for is very company-specific. To find benchmarks it’s best to triangulate from peers and investor conversations. For growth, it’s about showing that you have a credible path.”
Have a Big Vision (But OK to Start Small): “To raise a top series A, be able to show a path to $100M and then potentially $1BN in revenue.”
Build a Clear, Compelling Narrative: “Why now? Why was this impossible just a short time ago? Why does the world need your solution today?”
Build Out Your Team: “When elite talent is willing to stake themselves in your company, it’s a reliable heuristic for investors.”
Chart a Path to Defensibility: “Top investors want to back you when you can show why you’re the category leader in a winner-take-most market.”
Create Scarcity: “ If you think you can raise a large round, set expectations a little bit lower and let competition drive the amount up. Nothing appeals to a VC’s FOMO like an oversubscribed round…”
Build VC Relationships Early: “Ideally start VC relationships 6+ months in advance of raising to maximize your chances of getting the ones you want. As a benchmark, you can hope to get on average 1 term sheet for every 20+ introductions.”
Project Momentum: “Find the “minimum viable excitement in a future vision” that you can set expectations with, and then consistently beat those expectations to create a feeling of acceleration.”
Climb the Ladder of Proof: “Whatever “rung” of proof you were able to climb to in your last funding round, climbing to a higher one than that is a good sign of progress for a VC.”
Make a World-Class Pitch Deck: “Have lots of data available in an appendix or within the deck. You want to leave an impression of your outstanding knowledge, analysis, and insight.”
Build Social Proof: “As much as you can, bring on top advisors, influencers, and angels into your circle to gain social proof, and make sure you showcase them.”
Mike Ghaffary at Canvas Ventures has published his Marketplace Checklist, which consists of fifteen questions he asks himself as he familiarizes himself specifically with marketplace businesses.
Marketplace Questions
Which side of the network values the other side more?
Is there an effective and proprietary method for distribution to each side of the marketplace, especially the more highly valued side?
How strong are cross-side network effects, is there a metric that can measure that, and how has it tracked over the last year?
Are there same-side network effects, and how strong are they?
What are switching costs for each side?
What are LTV and CAC for demand and supply side?
What does liquidity look like, and how do you measure it (e.g. average amount of time from supply being posted to fulfilled / met with demand)?
What is frequency of use (transactions per month) for demand and supply side?
What is average transaction size for demand and supply side?
What is the marketplace take rate or monetization model, and what is the sustainable take rate over time and why?
Does it get easier to acquire incremental supply and incremental demand as this marketplace grows?
How fragmented is supply side?
Is there an initial focus on one or two geographies or categories, and how strong are the network effects there?
What is the winning strategy for that initial market, and what is the plan to scale beyond that?
Is there a new product enhancement to the marketplace / transactional user experience, such as Eat24 allowing more convenient food ordering from a mobile app vs the old model of making phone calls and needing a paper menu?
Originally Published:
November 20, 2016, A Seed Fund’s Investment Checklist, Upside Partnership
March 23, 2011, Questions VCs Will Ask You, Elad Gil
The Fundraising Checklist: 13 Proof Points for Series A, Pete Flint- NFX
April 7, 2019, Where I’m Investing and 15 Marketplace Questions, Mike Ghaffary
Return The Fund Exit (RTFE)
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This is a metric we use at Upside Partnership to think about our investment position within a company and how it relates to the fund overall. Instead of focusing on an ownership % target, we ask, “at what price does a company need to exit in order to return the entire fund?”