5 QUESTIONS INVESTORS WILL ASK ABOUT YOUR BUSINESS
I wrote this article for GovTech.com on "5 Questions Investors Will Ask About Your GovTech Business" - while the advice is targeting GovTech business owners, I thought some of the advice might be helpful so cross-posting.----
In last month’s article, we talked about the five types of folks who might want to buy a gov tech business. Now that you understand these groups, you’ve decided to respond to the emails and set up introduction calls.
Just like a job interview, you should prepare and have answers to the common questions you’ll be asked.
As such, here’s my quick guide to understanding the five most common questions you’ll receive and tips on answering.
1. "TELL ME ABOUT YOUR BACKGROUND."
While it may seem vague and open-ended, what investors are really trying to understand is “founder-business fit." What in your background led you to founding and/or running a gov tech business and why should an investor get excited about that?
You should come up with a quick pitch (2-3 minutes) covering your career story with a few key “success” milestones along the way. These milestones could be graduating from a top-tier school, a successful previous business or time as a leader in a government agency. Too often, I’ve found entrepreneurs either launch into an overly long biography or provide a brief answer that omits previous successes out of a sense of modesty. You want to leave the investor with a sense that you have been successful in previous endeavors and that your background is uniquely suited to continue driving growth in the business.
2. "TELL ME WHAT THE BUSINESS DOES."
With this question, investors are trying to understand “why does the business exist?" Remember investors likely know little about your business, so imagine explaining the problem you are solving to a smart teenager. Tell the story of:
What problem the government agency is trying to solve
Why previous solutions didn’t work well (e.g. pen and paper, email, Excel) and
Why your solution is the best to solve it.
I generally like to provide this high-level overview and then provide one concrete story (we started to work with X agency when dealing with Y problem. We implemented our solution and it led to Z). A bonus here is to show your true passion for the problem — the best entrepreneurs are truly obsessed with the problem they are solving and have thought about it 1,000 different ways.
The most common mistake I see with this answer is when a founder immediately jumps into features and technical specs. Yes, these may consume much of your day, and they will be important to talk about later, but start with the basics — what is the fundamental problem you are solving for customers?
3. "WHAT’S THE CURRENT STATE OF THE BUSINESS?"
With this question, investors are trying to understand your current revenue, current profitability and growth trajectory without saying so in as many words. You may be reluctant to share detailed financials, but it’s important to provide at least high-level information to save both you and prospective investors time. Most investors have clear size and financial profiles they invest in, and it's better to understand that in the first conversation than to waste your time with multiple discussions. You can share rough numbers, but here's a good example statement: "We work with 200+ government customers across the U.S., $2M+ ARR, growing 20 percent YoY with[redacted]percent EBITDA margins."
4. "HOW IS YOUR YEAR SHAPING UP? WHAT ARE YOUR PLANS FOR THE REST OF THE YEAR?"
Here investors are trying to understand your growth trajectory and priorities. Investors will be joining along in the future (not the past), so want to know the momentum of the company and where it’s headed. Items to touch on are revenue targets for the year, key upcoming product milestones, status of the pipeline, key investments for the year and key hires.
This is a classic area where under-promising and over-delivering pays dividends. The process from first meeting to investment can range from three months to three years. Investors will take notes from the call and will follow up in future meetings — if you keep hitting or overachieving targets, investors will notice and you will look great. The opposite is also true!
5. "HOW ARE YOU THINKING ABOUT INVESTMENT? WHERE ARE YOU IN THE PROCESS?"
Investors want to understand your openness to investment and your timing. Try not to look too scattered and all over the map. If you really don’t know, a simple statement like “my company is doing great, and I’m having a great time running it and excited about our 2021 plans. I’m a big believer in meeting folks before you need funding so just wanted to connect and open that relationship.”
If you are exploring a couple of options, just say that: “The company is doing great, and I'm really enjoying it. I’m exploring two options, a round of venture financing in the $5-10 million range or a round of revenue-based financing in the $1-2 million range currently, and I hope to make a call in fall 2021." Investors will appreciate the honesty, and it will save you (and them) a lot of back and forth to determine if they might be a good fit early on.
****As always, as a serial entrepreneur and active investor in search, let me know how I can help - [redacted] I also recently created a light-weight monthly newsletter with my "musings" - sign-up at bit.ly/etamusings ***