In today’s small business environment, monetary funding is almost always an issue. Even for larger companies, the capacity to obtain substantial financing can be the difference between expansion and success or stagnation and loss. For many companies dealing with new technologies, software, or innovations, the funding needs can be especially large.
Venture capital can be an interesting option, and can be available when traditional funding routes such as bank loans cannot be obtained. However, obtaining VC financing can be incredibly difficult and a very long process as well.
As someone involved in small business for some time, it can be brutal listening to the candidness of a true venture capitalist. A VC doesn’t hold back, and doesn’t refrain from asking the tough questions and playing the devil’s advocate. Entrepreneurs need to know what pain their product or service solves.
I recently had the chance to ask a prominent venture capitalist a few questions, and he had 5 questions of his own that he asked every entrepreneur looking for venture capital financing.
1) Are you in revenue?
This is a straight-forward question; is your business making money? How long until you will start making money? Discussions always find a way back to this question. Just because the company is not in revenue yet is not necessarily a bad thing, but you should be able to see it on the horizon.
2) How invested are you in the company?
To a VC, knowing this is very important. Is a person 20k invested in a company they’ve been working on for a year, or are they invested for 100k? In other words, how committed is this person to having their business succeed? How much is at stake for them?
3) What is your company’s valuation?
This question can be used for a few reasons but ultimately, the likely goal of a valuation is to determine how much equity will be exchanged for a certain amount of funding. As a small business, it can be tough to keep a valuation high but within reason while not undermining the company’s potential.
4) CEO and employees?
This is also an extremely important aspect that investors are looking at. In this case, our VC estimates he bases 90% of his decision to fund a company or not on the quality and credibility of the CEO and supporting team. Is there enough talent on the team to take the company where it needs to go? Is the management capable of taking the company where it needs to go? These questions will all play a role in how a company receives funding.
5) What is your market space?
It may be a bit surprising that this was the last question asked, as it seems one of the most relevant. Who is going to buy your product, and where is it going to be sold? Who are your competitors? For an entrepreneur, these answers should roll right off the tongue by now.
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