When it comes to the typical VC pitch, it often seems like one wrong answer can seal your fate. Fail to deliver what the VC gods are looking for, and you can pretty much forget about raising a new round of capital, right? Wrong. You'd be surprised at just how standard some of the GOTCHA questions are, and how easy it is to prepare for them.
For example, consider the following GOTCHA question: "Who else are you talking to?" On the surface, this would seem to be a relatively innocent question, one designed to put the aspiring startup entrepreneur at ease. But the question is intended to see who else has already passed on the deal or to see what types of investors have already signed on to your new round of capital. As a result, only mention names of confirmed investors who have already agreed to fund your company. In a best-case scenario, this might create a feeling of FOMO in potential investors worried about missing out on the chance of a lifetime.
You should also be prepared for this GOTCHA question: "How much are you raising, and at what valuation?" If there's one topic that excites venture capitalists, it's valuation. By knowing what your company is worth, it makes it much easier to figure out if they can get the right size to return out of your company. These days, VC firms are looking for 10x returns or better from any investment. Thus, if they put down $1 million in financing, they are expecting to make $10 million on the deal. So your pre-money valuation needs to be able to support this type of ROI.
In addition, venture capitalists also like to conduct a little bit of due diligence. Often, they'll ask, "Do you have a working prototype?" This helps them to figure just how far along you are on the commercialization of your product. (If you are still pre-revenue, and still don't have a working prototype, that's going to be a red flag for VC investors). If you're offering a service and not a product, VC investors are sure to ask, "Who are some of your paying customers? And can we talk with them?" What VC investors are looking for here is some evidence of traction. It's one thing to have a great concept, and another thing entirely to have customers willing to pay for it.
All GOTCHA questions share one thing in common – they are designed to challenge, test and prod you. They are designed to cut through all the industry jargon, all the marketing hype, and all the slick visuals. If you've ever watched "Shark Tank" on TV, then you know the sorts of GOTCHA questions they love to ask. Venture capitalists ask these questions for a reason – they are fully aware that only a small handful of their investments are ever going to be big home runs that pay for all their other failed investments. So they are doing everything in their power to make sure they are not just handing money away to the first person who knocks on their door. Once you realize that, it becomes a lot easier to answer these GOTCHA questions.