How to Answer Five Questions Every VC Asks When You’re Fundraising
When fundraising, CEOs get a few common questions from every VC. These questions may seem simple. But if you answer them incorrectly, it can derail your raise. So you need nuanced answers with particular words. During our fundraising at BenchSci, I went as far as memorizing my answers word for word.
Here are the top five questions and my suggested responses:
How far along are you in the fundraising process?
I got this question at every meeting that went well. Investors want to know how urgently they must act. I always told the truth. I gave the following answers, depending on the situation:
- “I’m running a fundraising process and focusing on funds that I think will be a great fit for us. I’m meeting partners from those funds later this week. I have a second meeting with some of them.”
- “I’m running a fundraising process and focusing on funds that I think will be a great fit. I have all partner meetings this upcoming Monday.”
Your specific response will, of course, vary depending on your circumstances. But it’s essential to understand the VCs’ reason for the question and to address it in your response.
Who else are you talking to?
Never disclose who else you’re talking to. It’s a small industry, and most VCs know each other. Once you provide a name, they might call a partner there. That can work against you as they might become allies instead of competitors. The answer I always gave was: “I don’t feel comfortable discussing their name. I would like to honor their confidentiality the same way I will honor yours.”
What valuation are you looking for?
You will always get this question from VCs that are interested. Be careful not to answer it! By responding, you’re just going to be negotiating against yourself. You’re not a valuation expert, the market is, and that should be your answer. This question is also an excellent opportunity to create urgency by reiterating that you’re running a process. My go-to answer is: “We’re running a fundraising process, and we’re going to let the market decide the value of our company. VCs are the experts on that, not me.”
How much are you raising?
How much you’re raising seems like an obvious and straightforward question, and therefore the answer should be a specific figure. That’s what I thought until I learned differently. Never give a particular number. The best response is a range. For example: “I am raising $5-$7M dollars”.
- It might impact your valuation, as the rule of thumb is that this will be 4–5X your raise.
- Investors might want to invest more than your ask to increase their return, or they might have a check size they are aiming for; you want to keep those options open.
Now, I didn’t feel comfortable giving a range when answering this question. The reason was that I didn’t want to look like I didn’t have my act together. We worked so hard on the financial models, and we knew exactly how much we wanted to raise. Fortunately, we found a creative solution to maintain financial trust and give a range. Here’s the answer I gave:
“We’re raising $5Mand are thinking about raising $2M in venture debt as it’s not dilutive and will give us some more runway if things end up taking longer than expected.”
I got two types of responses from investors:
- That sounds like a great plan; I can connect you to a few venture debt providers.
- I hate venture debt; I would like to write a bigger check instead.
To both, I answered: “Sounds great!”
Can I talk with your customers?
Every serious VC will want to talk to your customers before investing. That is a crucial part of their decision-making process. If your customers don’t say amazing things about your product, chances are you’re not going to raise your round.
While VCs will be eager to talk to your customers early in the process, you can’t allow it. To run a proper fundraising process, you need to target 30–40 VCs. There is no way you can ask your customers to talk to 30 VCs; that is bad for your business! But, you can send 4–5 VCs to speak with your customers. You achieve this by asking VCs to wait a bit more. Here’s what you say:
“I’m very excited for you to talk to our customers, and we already have a few of them lined up. Since we’re running a process, I can’t send all the VCs we’re meeting to talk to our customers. I’m happy to connect you to them after the partnership meeting if you decide to move forward/make us a priority deal.”
These are the most challenging questions I encountered during our fundraising rounds. If you have other great questions you’ve heard often, please add them in the comments!