An investor’s initial exposure to a startup is generally through its pitch deck. If the product or service captures the investor’s interest at this stage, they invite the founders for a meeting to discuss the project, business model, and team in detail.
Across a decade of experience in venture investments and being on the investor side of that process, I have invested $25 million in 52 startups from various parts of the world. Here are 10 sets of crucial questions I ask founders to help me decide whether to invest in their project.
- Are you confident that the problem your startup addresses is truly relevant? What is its geographical scope? Does the project have the potential for tenfold or hundredfold growth?
The problem your startup tackles must be genuine and urgent. A common mistake I see is startups launching a service that no one needs. Believing their idea will solve a significant problem, founders often launch a minimum viable product (MVP) and invest time and money only to discover their product isn’t in demand.
Geography is another crucial aspect. If your solution is only relevant in Japan, it won’t attract interest outside of Japan. Aim to solve problems in the global market. When the problem is widespread and your product effectively addresses it, the startup can grow exponentially. This potential for significant growth is what appeals to venture capitalists.
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- Have you thoroughly studied the market you plan to enter? What is its size? Who are your competitors?
Understanding the size of the market, the number of potential customers, and the demand dynamics for similar products is crucial. It’s promising when the market is growing, as this gives a startup the opportunity to scale quickly. However, entering an oversaturated market where the chances of success are low is risky. For example, launching another marketplace where giants like Amazon already dominate is not advisable.
Additionally, it’s essential to analyze your competitors and their offerings. Startups often claim they will simply undercut competitors on price, but this isn’t a sustainable advantage. Lower prices often imply lower quality, which is not a strong selling point.
- Have you validated your Product-Market Fit (PMF)? Show proof with traction and retention rates. If unsure of results, what other hypotheses are you exploring and how many?
The success of a project hinges on its customers. Investors need assurance that your product resonates in the market and that people are willing to pay for it, which can only be demonstrated through data. Key metrics include revenue trends, audience growth, conversion rates, and most importantly, retention rates over a sustained period, ideally six months or more. Retention rate particularly indicates whether your team has achieved PMF; if users drop off shortly after testing your product, it suggests a lack of perceived value.
It’s common for founders to attribute weak traction to a small user base, suggesting that scaling with more investment will solve the problem. However, success isn’t just about numbers; it’s about growth dynamics. A healthy project should demonstrate consistent month-to-month growth rates of at least 20-30%.
If you haven’t yet achieved PMF, it’s important to have multiple hypotheses ready. Outline these hypotheses, detail which ones you’re actively testing, and provide a timeline for completing these tests. This strategic approach shows investors that you’re actively refining and iterating based on market feedback.
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- What are your current unit economics?
Entrepreneurs often celebrate when their customer acquisition costs are lower than the revenue generated per customer. While some consider an LTV/CAC ratio greater than 2 acceptable, as an investor, I look for a ratio of at least 5.
- Why do you believe your market entry strategy will succeed?
Consumer behavior, purchasing habits, and responses to marketing efforts are heavily influenced by cultural nuances specific to each region. Success in a new market hinges on a deep understanding of these dynamics. If a founder has direct experience or fluency in the language of the target country, there’s a basis to proceed. Without these prerequisites, the likelihood of success diminishes.
- How extensive was your customer development process? Who were the experts involved in your analysis?
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 a minimum of 30 in-depth interviews with individuals knowledgeable in the industry, rather than relying on brief chats with acquaintances or fellow entrepreneurs. To analyze the gathered insights effectively, it’s beneficial to engage experts who can derive meaningful insights and pinpoint market pain points.
- Does your team possess deep industry knowledge?
What are your team members’ backgrounds and qualifications? Do you have industry experts on your advisory board?
Industry expertise is crucial to me as an investor. If a founder comes from the banking sector and is launching a fintech startup, I value their firsthand experience — they understand the industry’s pain points and nuances.
For founders without industry experience, I inquire about their advisory board. It’s essential to have advisors with 10-20 years of relevant industry experience to provide guidance and insights.
As an investor, I also consider the educational background of the founder. I may inquire about their academic achievements, including grades and thesis topics. A solid educational foundation adds credibility to the founder’s qualifications.
- What is your entrepreneurial background? Have you launched startups previously, and what were the outcomes? What lessons did you learn?
Entrepreneurship is a rare talent; from my experience, only about 2% of individuals possess it inherently. I value founders who have gained experience in large corporations before embarking on their own ventures. Additionally, I have greater confidence in founders who have undergone 1-2 unsuccessful projects.
In my view, success alone doesn’t provide valuable lessons; it’s the mistakes and setbacks that offer profound learning opportunities. It’s crucial that a founder comprehends and evaluates these experiences.
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- What current challenges are you facing in your process? What obstacles have arisen, and what strategies do you have in place to overcome them?
My confidence in a project grows when founders openly discuss challenges and setbacks. Being candid about what’s not working demonstrates resilience and a commitment to finding solutions.
Sometimes initial hypotheses don’t pan out, but determined founders continue to explore and iterate. Other times, customer acquisition costs may be prohibitively high, prompting them to experiment with new acquisition channels.
I’m always open to offering solutions where possible. However, if founders withhold information about their challenges, it diminishes my confidence in the project.
- What is your ultimate goal with the startup? Are you committed to putting in maximum effort to achieve it?
Building a startup often spans a decade-long journey. Therefore, I prioritize understanding a founder’s commitment level—whether they are ready to dedicate themselves fully to the project and their endgame aspirations: whether they aim for a profitable exit or seek to establish a lasting legacy for future generations.
I value transparency in responses. For instance, one founder candidly expressed a desire to exit the startup within 3-5 years. In response, I adjusted expectations accordingly, focusing on realistic growth targets rather than aiming for astronomical returns.
Conclusions
In my view, for a founder to achieve success, they need to be 120% committed to their startup.
However, it’s crucial that their passion for the idea doesn’t lead to overlooking potential challenges. When engaging with investors, demonstrate your expertise, unwavering motivation, and substantiate your claims with solid data. Being forthright about the obstacles you face also builds trust. Adopting this approach significantly enhances your prospects of securing funding.
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