The initial contact between an investor and a startup is often through its pitch deck. If the product or service interests the investor at this stage, they invite the founders to a meeting to debate the project, business model, and team in detail.
Over a decade of enterprise investing experience and being on the investor side of the process, I have invested $25 million in 52 startups from different parts of the world. Here are 10 sets of key questions I ask founders to assist me determine whether to take a position in their project.
- Are you sure that the problem your startup is addressing is really vital? What is its geographic scope? Does the project have the potential to grow tenfold or a hundredfold?
The problem your startup is solving must be real and urgent. A standard mistake I see is startups launching a service that no one needs. Believing their idea will solve a big problem, founders often launch a minimum viable product (MVP) and invest time and money, only to find that their product is not desirable.
Geography is one other key aspect. If your solution is relevant only in Japan, it won’t generate any interest outside of Japan. Try to resolve problems in a global market. When the problem is universal and your product effectively solves it, a startup can grow exponentially. This potential for significant growth is what attracts enterprise capitalists.
- Have you thoroughly researched the market you intend to enter? How big is it? Who are your competitors?
Understanding the size of the market, the variety of potential customers, and the dynamics of demand for similar products is key. This is promising when the market is growing, because it gives the startup the ability to scale quickly. However, entering an oversaturated market where the possibilities of success are low is dangerous. For example, launching one other market where giants like Amazon already dominate is not advisable.
In addition, it is vital to investigate the competition and its offer. Startups often claim that they may simply undercut the competition, but this is not a sustainable advantage. Lower prices often mean lower quality, which is not a strong sales argument.
- Have you validated your product-market fit (PMF)? Provide evidence in the type of traction and retention metrics. If you are unsure of the results, what other hypotheses are you testing and how many are there?
The success of a project depends on its customers. Investors need assurance that your product will resonate with the market and that individuals are willing to pay for it, which may only be proven with data. Key metrics include revenue trends, audience growth, conversion rates, and most significantly, retention rates over a longer time frame, ideally six months or more. Retention rates specifically indicate whether your team has achieved PMF; if users are abandoning shortly after trying your product, this means a lack of perceived value.
Founders often attribute poor traction to a small user base, suggesting that scaling with a larger investment will solve the problem. However, success isn’t just about numbers; it’s about growth momentum. A healthy project should reveal consistent monthly growth rates of at least 20-30%.
If you haven’t reached your PMF yet, it’s vital to have multiple hypotheses ready. Describe those hypotheses, detail which of them you’re actively testing, and provide a timeline for completing those tests. This strategic approach shows investors that you just’re actively refining and iterating based on market feedback.
- What are your current unit economics?
Entrepreneurs often have a good time when customer acquisition costs are lower than revenue generated per customer. While some consider an LTV/CAC ratio greater than 2 to be acceptable, as an investor I look for a ratio of at least 5.
- Why do you think your go-to-market strategy shall be successful?
Consumer behavior, purchasing habits, and marketing responses are all heavily influenced by the cultural nuances of each region. Success in a recent market depends on a deep understanding of those dynamics. If a founder has first-hand experience or is fluent in the goal country’s language, there is a basis for motion. Without these prerequisites, the likelihood of success decreases.
- How extensive was your customer development process? Who were the experts involved in your evaluation?
Effective customer development significantly increases the likelihood of identifying a critical problem. Finding a viable solution and developing a business model takes time and resources.
A well-executed customer development process involves conducting at least 30 in-depth interviews with industry insiders, reasonably than relying on transient conversations with friends or other entrepreneurs. To effectively analyze the insights you’ve gathered, it’s helpful to bring in experts who can provide meaningful insights and pinpoint pain points in the market.
- Does your team have in-depth industry knowledge?
What are the backgrounds and qualifications of your team members? Are there industry experts on your advisory board?
Industry expertise is key for me as an investor. If a founder comes from the banking sector and is launching a fintech startup, I value their first-hand experience—they understand the pains and nuances of the industry.
For founders with no industry experience, I ask about their advisory board. It’s essential to have advisors with 10-20 years of industry experience to offer guidance and insight.
As an investor, I also consider the founder’s education. I can ask about their academic achievements, including grades and thesis topics. A solid educational foundation lends credibility to the founder’s qualifications.
- What is your entrepreneurial experience? Have you founded startups before and what were the results? What lessons did you learn?
Entrepreneurship is a rare talent; in my experience, only about 2% of individuals have it innately. I value founders who gained experience in large corporations before starting their very own ventures. I also have more trust in founders who have had 1-2 failed projects.
In my opinion, success alone does not provide beneficial lessons; it is the mistakes and failures that supply profound learning opportunities. It is crucial for the founder to know and evaluate these experiences.
- What current challenges do you face in your process? What obstacles have emerged and what strategies do you have to beat them?
My trust in a project grows when founders openly discuss challenges and failures. Being honest about what isn’t working shows resilience and commitment to finding solutions.
Sometimes the initial hypotheses don’t pan out, but determined founders proceed to explore and iterate. Other times, customer acquisition costs will be prohibitively high, leading them to experiment with recent acquisition channels.
I’m all the time open to offering solutions if possible. However, when founders hide information about their challenges, it reduces my trust in the project.
- What is your ultimate goal in a startup? Are you committed to putting in maximum effort to realize it?
Building a startup is often a decade-long journey. That’s why I prioritize understanding the founder’s level of commitment—whether or not they’re ready to totally commit to the project and its end aspirations: whether or not they’re looking for a profitable exit or creating a lasting legacy for future generations.
I value transparency in the answers. For example, one founder openly expressed his desire to depart the startup inside 3-5 years. In response, I adjusted my expectations accordingly, focusing on realistic growth goals reasonably than astronomical returns.
Conclusions
In my opinion, for a founder to achieve success, they have to be 120% committed to their startup.
But it’s crucial that their passion for the idea doesn’t make them overlook potential challenges. When working with investors, reveal your expertise, unwavering motivation, and back up your claims with solid data. Being honest about the obstacles you face also builds trust. Taking this approach significantly increases your possibilities of securing funding.