Fundraising financial questions: What venture capital startup interview questions will be asked

This is the fourth part of a series of venture capital startup interview questions, on fundraising financial questions We cover almost every question an investor will ask you when you are pitching to raise money, so you are totally prepared.

Unlike resources on the internet that just provide a few questions, this resource is unique as:

  • We provide the insight into what the questions actually mean (They can be sneaky)
  • Almost all the questions you will be asked, rather than just a few indicative ones
  • Examples of what to actually say!

This instalment is on your fundraising financial questions. There is no way in hiding from these investor questions! You are guaranteed to be asked most of them. The tough thing is this area is not simple and you simply have to dedicate time to have a good answer. It’s only resources like this or the alternative of learning the hard way that you will learn how to answer! Learning by failure is for dummies. If you read all of these and do your homework, you should be able to deal with every curveball thrown at you!

We need feedback to make this as useful as possible. If there are any questions we may have missed or improvements to answers, sound off in the comments so this can get better for all founders, and even investors looking to build up their knowledge.

If you want to get updates on each instalment and to get a PDF version of the deal questions, download the PDF here, and I’ll email you when the new questions are up for you to be a total pitching pro.

Download the fundraising deal questions and get updates on new Q&A

[slideshare id=77891314&doc=financialquestionsvcswillaskyouwhenfundraising-170714230108]

Financial questions

Question: What is your burn rate?

What they mean

This means ‘how much money are you spending per month‘? Literally, how much cash are you burning?

It is implied by this question that you need to respond monthly.

There are two types of burn rate: gross and net. Gross is your straight up spend. Net deducts your revenue so it’s how much you are losing. Gross is the safer number to plan on since you can’t guarantee revenue.

Let’s do some math so you really get this.

Your gross burn is the amount of money you are spending per month, going out of your bank account. So if your costs are $100k per month then your gross burn is $100k.

Net burn is the amount of money you are losing per month so you net off your revenue. If your revenue is $20k per month then your net burn is $80k (100k in spend less the 20k of revenue).

Why do investors care about your burn and why is it such a common question?

In short, it tells you how long you have to live! If you have just raised and you have $1 million in your bank account with a net burn of $100k per month you have 10 months of cash in the bank left assuming your burn stays constant. However, if you went on a hiring rampage and you’re burning $500,000 per month then you only have 2 months of cash left. Shite.

The months left to live is called your runway. Your runway matters as it signals if you are about to run out of business, when you will need to raise again and approximately how much (Say 18 months times your runway). If you have a short runway it also tells investors who have the leverage… If you have a month or two left, then things are getting hairy and the investor can set the terms.

Furthermore, your burn can be telling about your operating model, hustle and founder mentality. If you’re achieving a lot with a small amount, it is very impressive! If you have a huge burn rate they will wonder what the hell you are doing if your revenue is negligible!

The next question someone might as is how many staff do you have. If you have a lot of staff and small burn, they might respond “wow, that’s impressive!” If not, they might wonder if the team is treating investor cash as a way to bank some cheddar.

What you need to say

“Our gross burn rate is $60k per month. On a net basis, it is $40k. Considering we are doing $240,000 run rate after 7 months, it’s not too bad right!

Post the round, we plan on taking this up to $120 gross in order to build out of engineers to strengthen our product functionality customers have been asking for, which with our targeted raise would give us 18 months runway at that run rate.”

Question: How will your burn rate increase after the round?

What they mean

pitch deck

We talked about burn rate. It’s how much you’re spending each month. But now you are raising again and likely for a lot more money than you raised before with the expectation you are going to grow a lot faster. Growth comes at a cost.

As you execute new strategies and scale channels, everything from marketing to customer success will scale up. This means burn.

A prudent CEO will think about the burn rate constantly. Once they raise the money they are not having a Champagne party, hiring their girlfriends on 6 figure salaries and leasing them cars (This actually happens).

Funnily enough, there is a rule of 18 months. It says that no matter how much you raise, founders will find a way to blow it 18 months.

You need to be thinking about how you are going to manage and grow your business. Yes, it can feel like there is cash burning a hole in your pocket, dying to be spent, and many founders fall for that temptation (encouraged by investors), but you need to know when is right to spend and when you should save.

How will your burn affect your runway? Is it sufficient to help you hit your milestones?

Do you really need to double burn the moment you close? Have you done all the prep work for key hiring decisions to make sense?

If you fumble to come up with a number, you have not been thinking about your financial plan in enough detail. The best answer will probably break it up into phases since you will not bring up your burn rate to the max immediately (Well you shouldn’t anyway).

What you need to say

“My plan is to hire department heads first so that they can build out their own teams. It will take them some time to acclimate to our company and to start recruiting key members of the team.

Until this happens we will not be ramping up our marketing spend. Our burn rate will stay relatively similar to what it is now for the next four months.

From then on we will take it from $60K up to around $120k pm. If we see a lot of traction, we may push more heavily on marketing. In any case, we will ensure we get a full 8 months of execution before having to go back to investors and 6 months to ensure we get it done.”

Financial questions for startup fundraising

Question: What KPI are you focused on?

What they mean

KPIs are Key Performance Indicators. They are what you focus on to indicate the viability and potential of your company. You need to identify them, track them and act on them religiously. If you have no clue, check out the free OKR, KPI and PPP tracker to collaborate with your team.

When you are asked this, the investor not only wants to understand what your numbers actually are but how you think and what you focus on.

The KPI of your company will depend on the industry that you’re in and the stage of your evolution. Whilst everyone will have slightly different numbers they focus on, there are a lot of commonalities. Focusing on esoteric numbers, aka the wrong ones, may raise questions.

Listen to what they said. They have asked you what you are FOCUSED on. You are not to pull out a dashboard of 200 numbers. Give them the 3 to 5 key numbers that you are actually tracking daily. Examples of these could be sign-ups, revenue, growth rates, retention, referral rates. You should know what these are already, or you should not be raising. The earlier the stage you are the more top of the funnel you are likely to be focused on.

A focus is really important. If you track a lot of numbers and you feel they are all important, don’t tell them that. Answer their question about how you think they want to hear it.

You’re going to have to say what those KPI actually are, so you better know the numbers off by heart and be able to explain the evolution of them. You should also know the implications of those numbers.

What you need to say

“We recently changed the KPI that we focus on since we are moving to scaling, rather than identifying product market fit.

The ones we discuss daily, weekly and monthly are the following three:
 1/ 30-day customer retention,
 2/ sign-up growth rate, and
 3/ referral rates.

We picked these as we are heavily focused on retaining and getting our customers to refer us. Of course, we track the NPS through exit polls, and periodic in app pop ups, but this is a secondary KPI to us.

Now, I’d be happy to talk to you about these 3 KPI and how they have been evolving over the past 12 months.”

Question: If you could pick only one non-financial metric to measure the success of the business, what would it be?

What they mean

This isn’t a silly question. This is a “thinking man’s question”.

How your response to this question can be telling. Revenues and profits are a great, fundamental way to measure the success of your start-up, so asking for financial metrics will not elicit anything insightful.

This question instead is more interesting. What you focus on for your non-financial metrics can be very revealing as it shows what do you care about. If you were to say the amount of PR you personally get, then you are an egotistical tosser ;). Answers which are customer centric are safe. Depending on your business, you might pick something product related?

If a question sounds a little tricky, it’s totally a test. Pause and think ‘why is she asking this?’ What does she want to hear? Don’t just let words fall out of your mouth. Remember you are selling.

What you need to say

“Without a doubt it is NPS. To have a high NPS requires us to do so many things right. And success is not one thing, it is 2,000 little things that you pay attention to and get right; those little things are the experience the customers have.

We could drive ourselves crazy thinking about each one of them, and tracking them, or we could just see how much a customer love us, or not, post hoc!

We constantly ask this question whenever we are not sure about the outcome of a course of action. “Will this increase our NPS or not? If it will do it. If not, well then we should focus on something else.

We give staff a lot of decision making freedom. The only justification they need to offer is “I thought this would drive NPS”

Question: Walk us through the fully burdened unit economics of your product or service?

What they mean

There are two implications of this question. Firstly do you know your business, and secondly, what does your business look like when it grows up?
 So dealing with the first part, this is a pretty tough question if you do not know your business well! For a SaaS company, this would include fully burdened CAC, salesperson compensation, expected lifetime revenues, churn, expansion, upsell, etc.
 You are looking to show that 1/ the unit economics are positive, ideally sexy, and 2/ you know your ass from your elbow, AKA does the CEO understand his business and can he communicate it?
 Now, for the second part. Financial statements and metrics illustrate what a company looks like historically and presently. You hire staff, you get AWS, you pay for an office and all the other line items in a PL/BS. These things can’t illuminate the future, it just shows what an unprofitable startup looks like. So if you can express your unit economics well, such as that you make more money from a customer than it costs to acquire and service, if you spend more money and scale, you can get an idea what you look like grown up. To understand you as something desirable to acquirers, you have to understand what you look like sub-scale. Otherwise, you are just more of not very pretty.

What you need to say

In the words of a founder of Redfin:

For us, this meant explaining what Redfin made this summer on a single home purchase, with a per-transaction account of what we spent on marketing to get customers ($27), on local data ($153), on customer service ($2,906) and so on. We also calculated how much annual revenue we got for every monthly unique visitor.

We knew our margin before but hadn’t broken the numbers down into their most easily handled form. This is important. Numbers are just numbers if they aren’t simple enough to act on; a linebacker with a simple playbook can react rather than think during the game. Knowing that the big number is how much we spend on our customer-service team refocused us on making sure we hired the right team and invested in its happiness.

Financial questions for startup fundraising know

Question: When will you be profitable?

What they mean

This is a loaded question. Where do you start?

Laughing out loud and smacking the table with your hand is not the way to deal with this.

The ideal answer would be based on demonstrating optionality and the trade-off between growth and profitability.

You could assert that your key focus is to grow to a point of scale at which point you have the option to continue scaling or to focus on profitability. That’s a nice place to be since you are not dependant on the investment climate for your survival.

Remember that, privately at least, VCs only care about growth.

Now, this is something traditional investors would ask. By that, I mean anyone who doesn’t understand tech. Most VCs would never ask this to an early-stage company. If you get asked this by a traditional investor you might need to explain how the game works. Which can kill a deal, but at least you won’t get stuck with someone who pushes you to act in a way you don’t like.

What you need to say

“At present we are subscale. There is no way for us to be profitable until we have approximately 1,500 customers and an adjusted cost base.

Once we have reached this customer milestone we have an option between scaling up to a significant company or focusing on profitability. Naturally, there are consequences to our valuation and exit options.

Once we have better insight into our payback period and LTV, we should be able to have a clear line of sight on what it would take to become profitable. This would give us the option to be profitable if the investment climate was negative. I believe it would take us two years to be profitable if we took that route.

Let’s be clear, we’re gunning for a large exit, not a small one. Can we make sure we are on the same page of the scale of business we want to build, to avoid any surprises in future? I think this is important.”

Question: Are you focused on growth or profitability?

What they mean

This is the same question we just went through but phrased differently.

Frankly, this is something a smarter investor would ask. When you will be profitable is something a neophyte, traditional investor, playing tech investor would ask.

If you’re talking to American investors it’s more likely that they want you to focus on growth. Growth is what investors care about. If you respond profitability, they may wonder if you really are a venture-capital type business and founder.

I wouldn’t’ ridicule the notion of being profitable. Being ‘profitable’ means you are default alive rather than default dead. Default dead means you are dependent on investors. Default alive gives you negotiating leverage.

What you need to say

“We are trying to build a real business with fundamentals, but we are aware that we are building a venture capital funded business. I have studied how analysts value publicly traded companies too, and it is clear that the highest r2 is growth.

So our focus is on growth but being frugal where we can. Bezos has shown that margin is an opportunity. Being able to get profitability if we need to is something that we have to consider, of course. We want to stay the course and being able to flip to profitability would give us great optionality if the landscape changes.”

Question: How can you reduce your break-even rate point up 6 months in your plan?

What they mean

Insert groan. Tricksy little Hobbit.

This the most devious question I have read. Some famous VC likes to ask it (Bill Gurley or someone). This is grade-A hard.

You can’t answer if you don’t really know your model and all the drivers of your business. What can I say other than you need to know your stuff, or get your CFO to help you! Don’t just look and say, “Um, Jim!”

Do some quick, logical thinking. What are the key drivers of your business? It’s going to be around revenue, growth and cost, right? So what’s the derivation from those three points? List what they are, how they can change and what you would do if you had to make a move to profitability.

What you need to say

“The basics of any business are revenue and it’s COGS, expenses to maintain the current client base and the costs invested to grow. To bring our break-even point closer means we either need to make more revenue or spend less which impacts our growth. Marketing spend impacts growth revenue and the variable component of our cost base, so that’s a delicate balance.

Given that we break even on customers in six months and then start generating profits on them, we will have to make this decision a year in advance. Decreasing marketing a year earlier would prove profitable cohorts. We could also be more judicious in customer targeting to reduce…

Making these changes would involve a change in our business model and our go to market plan, but it would be possible.”

Question: How large is your ESOP pool?

What they mean

At Series-A and beyond, you will be required to have an ESOP. This will vary between 10–15%. To understand this, read my blogs here and here.

The ESOP comes out of the pre-money, meaning you the founders and previous investors are the ones getting diluted. You want to make an ESOP only as large as you need to get to the next round.

If you don’t have an ESOP, or it is very small, they will just tell you how large they expect it to be in the term sheet. The way you manage this is through making a hiring plan and being forward about it to control the narrative.

What you need to say

“We set up an ESOP of 10% in the last round. We have issued staff 2%, so there is 8% left. According to our hiring plan in this round, we will need to give 6% to staff, so our ESOP has us covered already. We checked some comps and this seems in line with the market.”

Question: What percentage of the company’s equity do the employees and founders currently own?

What they mean

This is sort of the same thing as asking how large your ESOP is, but they are also asking how much the founders own.

Let’s skip the ESOP part for now. How much the founders own is really important, since investors want them to be motivated to make a lot of money. If the founders do not make money then the investors will not make money. Simple equation!

However, since there’ll be future rounds of investment, there will also be future rounds of dilution. Dilution means the founders own less. If after an angel round, the angels’ already own 40% then the founders have 60%. A successful company may have 5 rounds of dilution at about 20% per round. That 40% the angels got is bad news. I have seen seed stage investors tell the angels there is no deal happening unless there is a recap. Read here and here.

What you need to say

We have done two rounds of funding so far. We are doing our A now. The founders own 60% and the ESOP is 10%, of which 3% has been issued. Pretty standard.

Question: What ESOP is left?

What they mean

This is a rose by any other name. They want to know how big of an ESOP they need to ask you to swallow before they invest.

Tell them how much was allocated, how much was issued and what is left. Then tell them what your hiring plan is for your runway, who you plan on issuing it to and finally if you plan on making the pool larger.

You could add that you plan on increasing the allocated ESOP from 10% to 12% out of the pre.

What you need to say

We have issued 3% out of the authorised 10%. We have a hiring plan to issue 4% more this round, so we are covered.

Question: Do you have a model?

What they mean

Do you have a financial model? Have you spent a long time making an excel model which shows every little detail of your company and how your company will scale up?

The answer is always yes, even if it is no! Think about series 1 of Silicon Valley where Jared needs to come up with a business plan over night…

You have to have a financial model. They are not easy to make but they are absolutely critical. I was working with a founder in Europe and we discovered the CAPEX required to services customers would mean a massive outlay of cash and that’s his economics would simply not work. Seeing this he did a deal with the GM of Apple in his country and the leasing basis model has revolutionized his economics. That’s the power of a good model!

If you are in SaaS, read this. If you are in eCommerce, this.

What you need to say

“Sure, I can send it over to you once we are done. The key financials are in the appendix of the deck.

I would be happy to walk you through the high-level now if you like?”

Question: What are the key assumptions in your model?

What they mean

If you read nothing else, read this:

Under no circumstances tell investors your numbers are conservative!

This is super cliché. Everyone says it and it’s total bullshit.

Your numbers will not be right, they can be wrong though.

In order to answer this question, you need to know what the assumptions are in your model, surprise! Tell the key ones. Double shock!

You can tell a story with numbers, so do that. Maybe start with your goal, and then what key things you are going to do to hit that goal.

What you need to say

“Cool, our goal with this round is to get to $10m ARR. So, let’s focus on the key drivers on how we are going to get to that in 18 months.

We are a SaaS company. We generate revenue by the number of customers we have, how much we charge them per month and how long we keep them, meaning the churn rate.

Our profitability is determined by our COGS, to get to gross profit, we deduct our operating expenses.

Given the stage we are at, the top line and our COGS are our biggest focus. Now to be more specific, we assume we have three pricing packages…”

Financial questions for startup fundraising invest

Question: What are the key drivers of growth?

What they mean

This is very much the same question as the one we just went through, but they are giving you a little more direction.

The investor is trying to understand whether or not you understand the model that you apparently made, as well as what you should be focusing on. To get an A in this exam, you need to show an understanding of what matters.

The only costs related to growth are your marketing expenses and your COGS to support them. You should focus on acquiring and retaining customers. You can go further by detailing your go to market strategy in these drivers, such as leveraging channel sales and what you think the CPA/CPLs will be.

What you need to say

“Adding and retaining customers with strong unit economics are what matter. If we can profitably acquire customers with a low payback period then we will print money. We aren’t there quite yet, but this is the plan!

We are highly focused on distribution via channel sales. Our COO has a lot of experience here, having done it for both Xero and MailChimp, so we’re going to double down on what we are good at. The more partners we can add and the marketing relationships we can develop the better. We will, of course, have to scale up the support team here. We have some good hires in mind already”

Question: What do you do if your top line expectations do not match expectations?

What they mean

This is another test to see how the founders respond under pressure, and how well they have thought through their business.

pitch deck

There are real ramifications of not growing your top line; growth is what investors buy into. If you do not grow your top line, you may not be able to receive additional funding. If you cannot raise on the terms you want, and you’re not profitable, you are default dead with a D.

There are a number of ways to respond to this. There isn’t a specific correct answer. What matters is that the response is logical. You, of course, can disarm this question by making a joke, but you are still likely going to have to give a response.

Offering that you have developed a base, downside and upside scenario depending on the market reception makes you look prepared. So reciting the playbook of the downside case is what you start with. Then you want to slide in the upside case to inspire them to what could be…

What you need to say

“Well, I don’t think anyone will be happy, including me!

The team and I, have put a considerable amount of our sweat and tears into building our baby. We have mapped out how we believe we can best go to market and scale. We believe that we have a firm grasp on our unit economics, but of course, no battle plan survives contact with the enemy.

The market is considerably large and we believe this is the best timing for us to penetrate the market with our differentiated product.

There will be warning signs. You don’t suddenly hit a binary test point as to whether or not we have succeeded and are materially off plan. Whether we are meeting expectations can be viewed weekly and monthly. If we are not meeting our monthly target, then we adjust our burn rate and scaling plans and consider options including pivoting.

We have developed three plans in our financial model: a base one, the one we presented. We also have a downside and upside scenario.”

Question: How many customers do you need to break even?

What they mean

They mean this quite literally. How many do you need to break even assuming an average ARPU?

You either know the answer or you do not. Of course, there can be variability in this number, but the right answer is the one based on your plan.

If you need a massive, unrealistic number than you may have issues. VCs will do an analysis of what it takes you to be viable. I know this to be true.

So when you are reviewing your model, run this analysis and learn the number.

What you need to say

According to our base case, we break even in January 2019. At that point, we will have 1200 customers, and be doing $1.2 million ARR. Of course, if we are more aggressive this will change.

Question: How do you make money?

What they mean

This is a fairly basic question and it it’s all about your business model and how you do pricing, how that late to your unit pricing. Let’s pretend that you are Gillette. You would say that you give the razors away for free and charge for razor blades. You would then explain the cost of the razor and then the huge margins that you get on the razor blades. It is best to address this question by explaining your business model, and how smart it is. Read this to get smart.

What you need to say

“Whilst Dollar Shave Club did not invent their business model, we were inspired by them. They sold for $1 billion which is not too bad!

Subscription is powerful, so we adopted the same key principle. The market for shaving is, of course, large, but the market for beauty product discovery is even larger.

Every month we send our customers a box of five pointless products. Since they are totally pointless, we will never run out of pointless things to send. So on a recurring basis, we charge our customers $39. For our first full year cohort, we have a 73% retention rate…”

Question: What’s your business model?

What they mean

We just brought up the point of the business model. Now they are asking about it specifically. You absolutely have to be able to answer this question, since that is what the investor is investing in. Remember you are in a sales meeting, so saying that we sell stuff on the Internet is not that visionary thing that investors want to buy into

I love this story from Fred Destine at Accel:

“If you think about TJ Parker at Pillpack — if TJ had come into my office and said: “I’m building an online pharmacy,” it would have been a short conversation. But he comes in and he says: “I’m helping people with complex conditions live better, I’m giving them back their lives because they don’t have to do pill boxes … I’m making sure they medicate properly, and I’m all about life, I’m all about enjoying life, my mission is to help people live better lives through better pharmacy,” that to me is a narrative that I can relate to because I am thinking: “I can hire people against that narrative, I can build partnerships against that narrative, I can market against that narrative — and, it’s imbued with a sense of purpose.”

You need to tell them a story. The more that you understand business model strategy the more compelling you’re able to tell the story, and simply. Get your story straight.

What you need to say

“Some people sell shoes on the Internet, we deliver happiness. When you think about your experience with any ecommerce, what is the first thing that crosses your mind? Probably a painful, boring experience, with horrible customer care.

Before we started Zappos, we hired McKinsey who did an extensive study and found that 73% of people would shop on a site more regularly if they had amazing customer care, and the fantastic returns policy. We acted on this market insight and designed our business model to deliver the happiness they wanted.

Of course, the first thing that you are thinking is that this is going to cost a lot of money. And you’re right! However, whilst we lose money on a first three purchases, our customers buy 37 times year.

I’m sure you don’t need to be an expert to do the basic math. Let me do it for you anyway. We have 34 purchases at an average basket price of $70. The gross margin is 40%…”

Question: How quickly are revenues growing? What is fuelling that? What are the bottlenecks?

What they mean

Investors are getting interested in you and so they want to know more information.

They may even be getting excited by this point, but they still need to make sure that the fundamentals are here.

If you are growing faster than the industry average, then you already have their attention. But if you are growing by doing Groupon every week then you smell.

If the “fuel” is word-of-mouth then you’re very special indeed.

The question about bottlenecks is merely how can you grow even faster if you can remove them. That investors’ money is one way of removing the bottlenecks. The bottlenecks can be all sorts of different things, depending on your business model. It could be hiring, it could be funds to blow on marketing etc. Your architecture being total rubbish and you have so much technical debt that Greece feels bad for you is a really bad bottleneck.

What you need to say

“Our one-year CAGR is 40%, for the past 6 months, we have been growing at 50% MoM.

Things have really been beginning to pop since we started our buy one get one promotion. Customers really seem to buy into the social good that we are doing by giving free Snapchat credits to starving children. I wish that we had thought of this earlier.

Really the only thing holding us back is the fact that the starving kids don’t have enough data access. We could improve our sales cycle dramatically with drones blanketing wifi over….”

Financial questions for startup fundraising accountant

Question: What’s your price point, and what’s your pricing methodology, and why did you settle on both of these?

What they mean

What is your pricing point? How many different pricing packages do you offer? Do you offer an enterprise package? Do you offer professional services? What is the way upon which you’ve settled on the prices, and how did you come to that decision? Are your prices too low or too high?

One way or the other you are charging something for your product, so why are you charging those priced? I presume you know, so tell them.

Of course, maybe you’re like Pinterest and don’t make any money… in which case what you have to do is say “We haven’t turned on the pipe… yet… But imagine if we did!” Yeah, apparently VCs buy that BS if you grow fast enough.

What you need to say

“We recently increased our prices, we had a thesis that we were leaving money on the table by only charging $50.

We decided to change the prices a month ago, but we have seen no drop off rate in our conversion and in our revenue growth. Customers seem to be relatively price-sensitive since we are offering them so much compelling value.

We estimate that they are guessing 20x RoI. That means we can still double and offer 10x value. We are still testing, but the results are quite compelling.”

Question: How do your customers think about ROI on their spend on your product/service, and what kind of ROI do they typically see?

What they mean

The best founders truly understand the value they are offering to the customers, but more specifically the dollar value of that.

One of the best pricing methodologies is to do things on a value basis, though there is a whole lot of that can go wrong with that. Particularly in enterprise sales when the procurement department is getting near bonus time and want to look like heroes.

I don’t know” is a bad answer.

The ideal scenario is to have a deep insight into how your customers use your product to solve a problem and how much that problem was costing them before they use you. In order to sell your products well, you need to understand these anyway.

The sales team should always be asking. I hope you know, so tell the investor.

What you need to say

We solve a very specific pain points. Customer care. Our artificial chat bot doesn’t sleep and has an 87% deflection rate which is above the current human rate of 60%. We charge half the amount they pay the staff, and not on a fully loaded basis. So, the simple math is they get a 2x improvement, the reality is far more.

Question: What are the profit margins/what might the margins be once the company reaches scale?

What they mean

How much money are you losing right now! I’m sure you are ;)

You want to explain the contributions to your losses at present, but how when you scale these will be divided over a fixed cost base, and that you have such large gross margins due to your small COGS, that the variable cost function is de minimus.

Clearly, this is what is great about software companies. Office is basically free for marginal customers. So set out what your fixed cost base looks like and how it will need to expand, as well as your variable costs. Link your growth to your marketing spend and how you get a payback.

What you need to say

“We are not profitable, we will not be profitable for three years as we cover our fixed costs and investment in marketing growth. That’s obvious, right?

However, things start getting very interesting in year three.

We have a very large fixed base in order to develop our product, which mainly constitutes development costs. But as you know software has a marginal cost to customers and we have developed an amazingly scalable and extensible architecture with minimal technical debt.

At scale, our margin should be a bit better than average, around 15% given the level of customer success we do. But since we aren’t focused on enterprise and leveraging a k-factor, our distribution costs will be small. We envisage EBITDA margins in the range of 60–70% in year 5”

Question: If your equity/salary was based completely on the accuracy of your projections, what would your forecast be?

What they mean

This question is a little tongue-in-cheek. They may be calling BS on your projections, they could even be getting a little annoyed that you will not give them realistic numbers?

It may be best to get to the point and be honest, or at least a little more open in sharing your logic.

Check out our “hockey stick curve” for users, traffic, revenue, etc. It doesn’t mean anything. Right now your numbers are near the X axis, and you are showing that they will be reaching the sky. Most founders think that they have to show this curve or they will not get funded, and so whilst you read that you have to do it, investors see these curves five times a day.

They want to know what you really think you will do. Yes, of course, you do not really know what the numbers will be, but they want to understand how you think you will get to really interesting ones.

What you need to say

“John, we ran three scenarios. If we do not do better than our downside case, I would be better off going back to Google and getting paid a lot more than I will earn here.

Of course, most start-ups fail, so let’s just assume this is the baseline, and everything else is a range of upside.

Here is what has to go right for us to exceed the baseline. Let’s talk about the key drivers. If we can agree on the drivers, then it’s a matter of…”

Financial questions for startup fundraising vc

Question: What are your 3-year projections?

What they mean

The investor fundamentally wants to know how big you think this business is going to get in a reasonable timeframe. Three years may seem like a long time to forecast in a business model plan, but time goes by faster than you think.

If you pick a number too small, then this is not an investable business by venture capital companies.

If you pick a number too large, then your number is not realistic, and you lose credibility. You have to be in between.

The best answer is to give a range, but of course, that is mostly what is not in your business plan. In year three you have numbers in cells. Add commentary after giving numbers. Control the narrative, and engage them in a discussion. Funding abhors a vacuum.

What you need to say

“Under our base case, in year three, we will have $55m GMV. At a 30% gross margin, and we are doing $20m gross. OPEX will be around $25m so we are losing $5m.

Depending on how things go I think our top line could be 40% higher or 20% lower. We still are figuring out exactly what our CAC will be. That’s such as crucial determinant of our cost and ability to grow the top line.

Nasty Gal, our nearest competitor, was doing $20 million dollars in year four, so even in our down case, we will still be very attractive.”

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