Hard Questions VCs Will Ask SaaS Founders

Source:

Team

• Who’s working in this company right now? How large is the team?
• How did the founding team come together? Who else have you hired?
• Why are you working on this problem (motivation)? What makes you uniquely suited to solve this problem (unfair advantage)?
• Are there any key gaps on the team you’d like to fill?
• Who are the other investors and advisors you’re working with?

Some of the key things investors are looking for that probably won’t get asked directly include:

• Is this someone I can trust?
• Is this someone I could see myself working for?
• Can this person tell a compelling story and define a compelling vision that will allow them to hire the right team and raise follow-on funding rounds?
• Does the leadership team spike on the product, engineering, sales, marketing, hiring, or something else?
• Where are this team’s weaknesses, and do they recognize them?
• How passionate and convicted is the team about this idea? Do they think there is the potential to build a multi-billion dollar company?

Product

• What is the product, who is it for, and what problem are you solving for them?
• (Generally, investors like to “see” the product because that clears up a lot of questions about what the product is vs. talking in theoretical terms about what you are building, but you’ll probably also get conflicting advice that says you shouldn’t show investors demos in a first meeting)
• How did you start building this product and working on this problem?
• What did your customers do before they started using your product?
• Does it “work”? Do your customers like it?
• — > If you are trying to help companies make more money, do you increase revenue? If you are helping companies save money and streamline work, do you decrease costs? If you are building an engaging consumer platform, do people spend a lot of time on your platform?
• — > This is probably an area where you will get into more depth in follow-up meetings, but try to give new investors a tweet-sized takeaway on the impact you are making on your customers, so they can remember and explain it to the rest of their team

In addition to having a good product (or promising signs that your product could be good), investors want to know if you got lucky or if you have the knowledge, skills, and team to continue making this product better and better. To understand how you think about the product, they will ask open-ended questions like:

• What are some of the unique or surprising things you’ve learned about this market?
• What does the product roadmap for the next 6–12 months look like?
• How are you prioritizing new features?
• What is the customer feedback on the current product?

Market

Investors are obsessed with TAM (total addressable market). They want to invest in companies that can grow, and an important part of that is having a big market (where you can steal share from competitors), a rapidly growing market (where you can acquire new customers), or ideally, both.

• How big is the market?
• Why is now the right time for a new product in this market?
• Why hasn’t someone done this before? If someone has, why didn’t it work?
• Who are the other competitors in this market, and how large are they?
• Who is your closest competitor? What are they doing right or wrong?

Go to Market

The key thing investors are trying to understand here is “how predictable is your go to market process?”

• Who is your ideal customer? Who is the end-user, and who is the buyer of your product?
• How do you find customers today? How do you acquire new leads?
• What is the typical buying process for your product? What’s the “happy path” for someone to hear about the product, get more information, and become a customer?
• How long was the sales cycle for your existing customers?
• Why do you lose new deals? Who do you lose to?
• Why do existing customers churn?

Depending on the type of business, investors will have a different set of questions for GTM, but these are some of the key questions that they might ask for an enterprise software company:

• How is the sales and marketing team structured?
• How do you acquire and process leads?
• What are the unique advantages you have to acquire new customers (e.g., open-source community, key partnership, etc)?
• What is the current sales pipeline? How does that compare to your forecast?
• What is the conversion rate from leads to closed won deals?

Business Model and Unit Economics

Having a very firm grasp of the strategies, tactics, and numbers that drive unit economics shows that you are able to zoom out from the day-to-day work and think about the long-term plan for the business.

• How much do customers pay for your product? How do you set pricing?
• What are your margins? How much does it cost to serve your customers?
• What is your sales and marketing model, and how much does it cost to acquire new customers and retain existing customers?
• How do you think these metrics will change as you continue to grow and scale-up?
• Are there other companies in your industry/sector? How does your unit economics compare to your competitors?

Traction and Trajectory

• Where are you in the company-building journey? Product, customers, revenue?
• What are the key metrics that you track as a measure of success? How have those metrics been trending over the last few weeks/months/quarters/years?
• How are you forecasting growth for the next 12–24 months? What are your key assumptions, and how did you come up with them?
• What were your growth assumptions 12 months ago, and how did you do relative to that plan?
• How could you grow faster?

Obviously, the key metrics will be very different for SaaS vs. marketplaces vs. consumer vs. hardware. Here’s a sample of what investors would ask an enterprise SaaS company:

• What is your ARR?
• How many customers do you have, and who are they?
• How much does your average customer pay you?
• What is your net retention/churn? What is your gross retention/churn?

Fundraising

There are a couple of signals that investors look for when they ask you about the fundraise itself. The main thing they want to understand is how much you’ve spent to get to where you are today and where you can get to tomorrow with more money.

• Who are the existing investors, and how much money have you raised so far?
• What are you looking to raise now, and what milestones are you hoping to achieve with this financing round?
• How are you planning to use the proceeds from this round?
• How much cash do you currently have, and what’s your burn rate?
• How are you planning to structure this round, and who else is investing in this round?

Miscellaneous

• “This will never work!” (or some variant of “your idea sucks”) — If someone is being a jerk, forget about it and move on. On the other hand, if a trusted friend is telling you why your idea sucks, take some time to reflect on their reasoning, so you don’t waste a lot of time on a bad idea
• “Have you thought about doing [xyz thing]?” — Investors love to come up with “great” ideas and patterns that match things they have seen in the past. Most of the time, whatever they suggest doesn’t make sense, but the important part is to walk them through how you evaluated the idea
• “What keeps you up at night?” — Investors want to know what you think are the biggest risks to (1) judge if those risks are acceptable to them, and (2) see if you are seeing the same risks as them
• What is your exit plan? — If you’re pitching a VC, do not tell them how you plan to sell the company after 2 years for $100M. That is great for you, but it doesn’t help the VC generate a good return for their investors.
• What happens if everything goes according to plan over the next five years? — A pitch shouldn’t be an interrogation. It should be a two-way dialogue on what the future looks like for your company. Investors ultimately invest in you and your vision, so they want to be aligned on what it looks like if everything goes right!