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Financial questions VCs will ask you when fundraising
F I N A N C I A L
Q U E S T I O N S
W H A T V C s W I L L A S K Y O U
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It doesn’t matter your sector, business model or
geography. Investors will always want to know about your
‘financials.’ It’s a way for them to really understand your
traction, attractiveness and your knowledge of your
business. Some of these questions will challenge a
seasoned CFO, so the only thing you can do is prepare.
If you read all of these and do your homework, you should
be able to deal with every curveball thrown at you!
This means how much money are you spending per month? Literally, how much
cash are you burning a month.
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! There are natural
implications of having a high burn rate, including how much you need to raise to
There are two types of burn rate: gross and net. Gross is your straight up spend.
Net deducts your revenue. Gross is the safer number to plan on since you can't
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
“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
How will your
A prudent CEO will think about the burn rate constantly. Once they raise money
they are not having a Champagne party, hiring their girlfriends on 6 figure
salaries and leasing them cars (This actually happens).
You need to be thinking 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
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).
“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.”
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 is 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. 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.
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 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.
“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.”
If you could
pick only one
success of the
would it be?
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.
“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 answer 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””
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,
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.
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
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.”
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
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
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.
“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
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.”
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
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
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.
“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
How can you
rate point up 6
months in your
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.
“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.”
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.
“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 market.”
equity do the
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.
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.
“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
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.
“We have issued 3% out of the authorised 10%. We have a hiring plan to issue 4%
more this round, so we are more than covered.”
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.
“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?”
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.
“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...”
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.
“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”
What do you
do if your top
do not match
This is another test to see how the founders respond under pressure, and how
well they have thought through their business.
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
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…
“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 mode: a base one, the one we
presented. We also have a downside and upside scenario.”
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.
“According to our base case, we break even in January 2019. At that point, we
will have 1,200 customers at an average ARPU of $1,000, and be doing $1.2
million ARR. Of course, if we are more aggressive this may change.”
This is a fairly basic question and it it's all about your business model and how
you do pricing. It’s an open question and game for you to tell a lovely story. you
can decide how you want to answer questions some times ;)
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.
You ideally want to slide in your special sauce and competitive advantage to
explain why you will keep raising money.
Read this to get smart.
“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
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…"
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
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
“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
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%...”
What are the
Investors are getting interested in you and so they want to know more
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.
“Our one-year CAGR is 40%, for the past 6 months, we have been growing at
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....”
and why did
you settle on
both of these?
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.
“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.”
How do your
about ROI on their
spend on your
and what kind of
ROI do they
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
The sales team should always be asking. I hope you know, so tell the investor.
“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
What are the
what might the
margins be once
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
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.
“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”
If your equity/
salary was based
completely on the
accuracy of your
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.
“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
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…”
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
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.
“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
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.”
We would love to hear from you!
Fundraising is a total nightmare
(Trust me, I’ve done it a lot!). We’re here to
help you with everything from getting a deck
done to making a model, and even taking
you step-by-step through the process,
whether you are raising $500k or $20m.
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