Tag Archives: R&D

TWENTY QUESTIONS YOU WILL BE ASKED BY VENTURE CAPITALISTS

(If You Get That Far)

Logo Tby Laurence K  Hayward

Most likely you’ve played the game 20 questions. As the contestant, you use your best combination of questions, which can be answered with a simple “yes” or “no,” in order to discover a piece of information held secret by the other player. The objective is to discover the unknown information with the fewest questions (from the 20 you’re allotted), as quickly as possible.

This game shares some common traits with a venture capital interview. As the interviewee, you can expect a barrage of questions. You might also feel like the interviewers are trying to box you in as they narrow the choices, in order to hone in on the “answer” as quickly as possible. Recognizing that venture capitalists reject a far greater number of deals than they accept, the quickest way for this interviewer to finish the game is to find a fatal flaw, a deal-killer, a quick “no.”

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A key difference between the game “20 questions” and the venture capital interview is that you, the interviewee, don’t get to answer the questions with a simple “yes” or “no.” So, in order to help you prepare, outlined below are 20 questions that venture capitalists most frequently ask entrepreneurs. Following each, I’ve included a brief explanation regarding what the venture capitalist (VC) might be trying to uncover. These questions aren’t necessarily in the order you would receive them, though the winnowing process was taken into consideration when creating this list.

 

1 – What is the market potential for your company’s product or service? What is the revenue potential for the industry, and what is its growth rate?

The VC wants to quickly ascertain whether the opportunity is large enough to pursue. What determines if the opportunity is large enough? Typically, it hinges on whether the VC will be able to achieve a target return within the designated timeframe (often three to five years). While all firms have different investment criteria, most VCs target a minimum internal rate of return (IRR) of 25 percent and many seek IRRs higher than 50 percent. To reach these thresholds, VCs look for companies with considerable market potential for their products or services (often $500 million, $1 billion or more). They prefer growing markets to retrenching ones. Also, most VCs focus on specific industries, so they’ll be trying to ascertain whether this deal is within their bailiwick.

 

2 – How did you calculate market potential? How do you determine industry sales and growth rate?

It is common for entrepreneurs to include very large market potential figures in their business plans and then indicate that they require only a miniscule fraction (e.g. one percent) of the market to achieve their projections. These figures are often suspect and lead to a rolling back of the eyes of the would-be investor. Further, VCs often prefer opportunities that capture a larger fraction of a target market segment otherwise its value may be questionable relative to the competition. Market potential should be verified by independent research as well as bottom-up and top-down calculations.

 

3 – What makes your business different or unique?

This question can have two wrong answers. A business can be both too common and too unique for a particular investor. If it’s too common, the VC will be concerned with the competition and the lifecycle of the business. If it’s too unique, the VC might be concerned with the time required to achieve critical mass. Many truly revolutionary products require educating the marketplace, and that can be an uncertain and lengthy undertaking. There is a saying that VCs prefer evolutionary over revolutionary businesses.

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compulsion

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4 – Why would someone be “compelled” to purchase your product or service? What specific needs does it address?

Venture capitalists look for businesses with products or services that address a demonstrable market need or demand. Is your product something the buyer needs? Or is it just something that would be nice to have? If it falls in the latter category, then it is critical to demonstrate how your product will gain traction, that is, how people will come to demand it based on market trends.

 

5 – How do you know that your business has high-growth potential?

Venture capitalists want to know how you “drew down” your revenue estimates from the market potential figures (which hopefully include estimates from external sources). Ultimately, they want to see a large growth opportunity that scales quickly, thereby allowing them to realize the payoff on their investment as soon as possible. Be prepared to explain in detail the process you used to estimate revenues and how/why they scale.

 

6 – What is it about your management team that makes them uniquely capable of executing on this business plan?

You’ve probably heard that the three most important items in private equity investing are management, management and management. More specifically, VCs are typically looking for management with experience in building a business (or comparable), deep expertise with the technology or industry product, and strong character. What comprises the latter? VCs look for managers who demonstrate high energy or passion, resourcefulness, integrity, perseverance, risk-taking ability and pure mental horsepower. A frequently overlooked quality is that of humility – understanding one’s limitations, the need for teammates with complementary skills and the ability to listen.

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Risk

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7 – What are the primary risks facing this opportunity?

Most people tend to think of “the competition” when people ask them about risks facing their business opportunity. However, competition is only one risk. Other risks include changes or shift in technology, governmental and regulatory policies, labor market conditions (availability to find qualified labor at a reasonable cost), business climate changes, product liability, computer crime, etc. And, don’t forget financial risks. For example, what happens if your capitalization doesn’t allow you to reach breakeven or your next financing event? A risk assessment of potential threats to your business can help you prepare for the scrutiny of investors.

 

8 – Who are your competitors?

You’ve heard the warning “never say never.” When answering the above question, the warning might well be “never say none.” There is more to this question than may first be evident. Certainly, VCs are interested in learning about the competition your business will encounter and how you will distinguish your company. But, they also might be assessing your maturity as a businessperson. The answer “none” is typically incorrect because your business almost always has at least two competitors. Potential buyers could simply continue to function without your product (e.g. through the use of a substitute, however less effective) or buyers could “do nothing” (e.g. choose not to utilize the product or service). Furthermore, if the investor is aware of competitors that you have not considered (as many have researched particular segments independently), he or she will lose faith in your business assessment skills – so be prepared.

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competitive advantage

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9 – What gives your company a competitive advantage?

Venture capitalists want to know how you plan to outmaneuver the competition –and this doesn’t just pertain to existing competitors. They want to see that you’ve given thought to future market entrants and how you will stave them off. “First-mover advantage” is rarely a sufficient response to this question. A more effective answer usually depicts intellectual property barriers or the ability to reach the target market in a way that is more effective than the competition. What is unique about your company that gives it an edge?

 

10 – Does the company have proprietary intellectual property in the form of patent, trademarks, copyrights, etc.?

What do you own? What can you protect? These are two important questions on the mind of any VC. In some industries (e.g. biotech), patents play a critical role in protecting the research and development investments of the company and in helping to ensure that there is a window of opportunity (usually before competitor offerings arrive) for the company to realize a significant share of revenues for a particular category. Trademarks and copyrights are critical to protecting the company’s intellectual assets and its “brand.” Also, at some point, VCs will also want to ensure that you’ve taken the proper steps (through non-disclosure agreements, non-competes, and/or employment agreements) to ensure that the company is protecting its intellectual capital.

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patent pending

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11 – When will your company break even in terms of profitability and cash flow?

Remember when you first became financially independent of your parents? Hopefully, you were at a point where your income exceeded your expenses and you no longer required their support. The concept here is similar. Once you’re financially independent, you’re also less of a liability. Of course, the ultimate goal is to reach an exit scenario quickly. Profitable businesses are more attractive to potential buyers or public markets.

 

12 – How do you plan to acquire customers?

A well-developed business plan includes marketing strategies that demonstrate an understanding of market realities and customer behavior. VCs are looking for much more than a list of your marketing initiatives. You can anticipate questions like: What are your company’s customer acquisition costs? Have you calculated average and target revenue per customer? Do you know how many customers are required to break even? Do you know the product sales cycle?

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13 – How do you plan to keep customers?

The most successful companies seem to have a plan for keeping customers –even before they acquire them. It is said that it costs five times as much to generate business from new customers as it does from existing customers. Customer retention is critical to long-term success.

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14 – What drives customer satisfaction for this industry and for the product? And, how do you know?

Have you conducted research in order to assess what is truly important to your customers? Do you know what product features are critical vs. those that are ancillary? Once you’ve acquired customers, you’ll need processes to ensure their ongoing satisfaction and your understanding of their changing needs. Have you considered how you’re going to support the product and the expenses associated with such support? Will existing customers purchase your product or service again? Will they recommend it to others? Regular and consistent customer feedback is essential in order to obtain the answers to these types of questions.

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15 – Who is the end user of the product or service offering?

Is this a consumer-based business, or will you sell your product or service to other businesses? What do you know about the demand for your product or service in that target market? What do you know about the buying habits of your target market? Do you anticipate any roadblocks? For example, will you have to educate the buyer? Also, give thought to how you can leverage partners or re-sellers to reach your target markets. Knowing the answers to these questions will be critical when you speak to a VC about your opportunity.

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team

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16 – What alliances or partnerships have you entered?

(e.g. joint ventures, marketing alliances, licensing arrangements, selling/distribution agreements, channel partnerships, software agreements, etc.)

It is important to remember that alliances can be assets and liabilities. Venture capitalists will want to know if any of your alliance agreements have compromised your intellectual property claims and if the company has any outstanding obligations to third parties. On the positive side, you’ll want to demonstrate how alliances may have helped your company lock -up certain distribution or sales channels for your products and services. Do any of your alliances give you a competitive advantage? Do they create barriers to entry? Do they help you reach customers more efficiently?

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17 – What is the anticipated lifecycle of your product or service offering? What are your current and future plans for R&D investment?

All great things come to an end. Products mature, competitors offer substitutes and customers demand change. Have you anticipated when the earnings power of your product will run its course –for first-time buyers as well as for follow-on sales to existing customers (e.g. upgrades)? What are your plans for R&D investment, and how will you continue to generate revenues when existing products run their course?

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child workers

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18 – How do you plan to expand your labor force?

While the precise conditions of labor markets change, it is always a challenge to find the best people. Venture capitalists will not only be interested in the composition of your existing workforce, but also in how you plan to fill key positions now and in the future. Have you used an executive search firm? Do you have qualified candidates currently under review? How will you compensate people, so as to attract, motivate, and retain employees, while keeping labor costs under control?  What does your option program look like?

 

19 – What are the probable exit scenarios?

Venture capitalists need to know how they’re going to monetize their investment, hopefully at an ROI of 50 percent or more. As an entrepreneur, you should spend some time thinking about who could acquire your business down the road. Be both realistic (particularly on timing and valuation) and creative regarding M&A possibilities.

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20 – What is the planned “Use of Proceeds”?

Venture capitalists want to know that their money is being put to good use in order to directly accelerate the business opportunity, so that they will receive their ROI in a timely fashion. One “no-no” is using VC investments to service existing debt obligations. Be prepared to present a timeline of milestones. Include a breakdown of how the money will be spent and what it will allow you to accomplish..

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Adapted from the Journal of the Heartland Angels  news.heartlandangels.com

This article is a summary of a larger article. The full 15-page article may be obtained by contacting VentureLab. ©2014 VentureLab, Inc. All rights reserved.  www.theventurelab.com

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About the Author

Larry Hayward 2Laurence K. Hayward is a founding partner of Independence Equity, an early-stage venture fund launched in 2011.  The fund is actively investing having recently completed its 8th investment.  He is co-founder of Cornerstone Angels, a network of accredited investors that has invested in 40 companies since 2006.  He is also founder/CEO of VentureLab, an organization that has been launching new ventures since 2002.  Previously, he was President of Vcapital.com, an internet start-up that matched entrepreneurs with investors, acquired in 2002.  Hayward has been forming, investing in and advising start-ups since 1999 following 8 years at Arthur Andersen in the Emerging Company Services practice.  He is a graduate of the Joint MBA/BS program at the University of Illinois in Champaign Urbana and hold Series 7 and 63 licenses.

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Image Credits

Wikimedia – 1954 DuMont Television/Rosen Studios, New York, MS Office Clip Art

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Chicago Venture Magazine is a publication of Nathaniel Press www.ChicagoVentureMagazine.com Comments and re-posts in full or in part are welcomed and encouraged if accompanied by attribution and a web link. This is not investment advice. We do not guarantee accuracy. It’s not our fault if you lose money.

.Copyright © 2015 John Jonelis – All Rights Reserved

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4 STAGES OF DEVELOPMENT

Technical Ice Climbing - National GeographicMichael Pollack of Rocket Fuel Labs

Verbatim, Part 2 – John Jonelis

“My firm, adamant business philosophy is that I sincerely and always want to under-promise and over-deliver.” Michael Pollack

I’m in the belly of the beast—the huge 1871 incubator in the Chicago Merchandise Mart that hosts universities, accelerators, venture capital firms, and private companies that help the many startup ventures housed in their space.

Merchandise Mart

Chicago Merchandise Mart – jaj

Entrepreneurs need an array of technology services that separate the merely ordinary from the truly extraordinary. Rocket Fuel Labs proposes to supply that technology on a contract basis. They act as part development studio, part incubator, part product-development resource, part innovation think tank.

I’m continuing a conversation with a genuine thought leader—Michael Pollack, CEO of Rocket Fuel Labs. As I write this, his own company nears its launch date.

Michael Pollack—When I think about infrastructure, I think about our business. It’s about providing technology infrastructure that businesses can build on. That’s where I get really excited about what we’re doing here.

John—Would you mind filling in a little more of your own history? Maybe pick up where we left off and lead up to your new venture.

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The Serial Entrepreneur

Mike—Sure. I happened to get into the logistics business—AFN—Advantage Freight Network. We were pretty successful. We grew the business to a very respectable figure in two and a half years. After the merger, I exited that business. I didn’t want to stay there anymore. I was immature.

John—You’re creative. You get tired of one thing and want to do another. I made the same decision after a merger.

Mike—I couldn’t have said it in a nicer way. Better coming from your mouth than mine. So I ended up in management consulting. I worked for a boutique firm here in Chicago called Sequence. Worked on some awesome projects.

We tended to do large not-for-profits, so I worked with AARP, American Chemical Society, Make a Wish Foundation. I got to work on one of my favorite projects—re-designing the “wish granting.”

If you think about the problem, the Make a Wish Foundation wants to create a wish—a different experience for every child in a cost-managed way. So we designed a process that could result in a little girl getting a princess wish and a little boy getting a wish to be a firefighter for a day, while controlling costs throughout the process, giving them visibility. It’s really cool—an amazing organization, an awesome experience.

In 2009; I started my own consulting business. One of my first clients was a freight brokerage in Chicago that was looking at buying a software package. I helped them audit it, picked out a vendor, and I think got a great deal on the software.

I enjoy software negotiation. It’s a purely theoretical, philosophical sales exercise and if you’re ideologically dogmatic about what you want, you can get anything. Because when someone is selling you a product with a 90% margin, you can pretty much negotiate all the way down. It’s a lot of fun if you enjoy that type of jousting, which I do.

John—As long as you don’t do a Jurassic Park—

Mike—Exactly. (We both laugh.)

Through a bizarre series of events, I happened to meet an entrepreneur who wanted to get into the logistics space. They were in the process of raising capital. I joined them, and we raised $3M in a Series A. Then we raised $6M in a series B from Charles River Ventures and Globespan Capital Partners. We took on $3M in venture debt so we had $12M invested in the business.

What we were doing, which was really exciting, was to disrupt those 14,500 brokers. We were trying to build the Kayak, Expedia, or Orbitz of the industry and put all the inefficient bloated travel agent-style firms out of business. Because what’s mind-blowing is these freight brokers operate at about 20% margins. We felt we could build a tech-enabled business, much more scaled, that could run at 7 or 8% margins.

John—I would think so, too.

Mike—So we did it. We were acquired by Echo Global Logistics here out of Chicago in March of this past year—and it’s pretty cool to know that the technology we built is powering parts of an almost billion dollar company. I guess we were so good that we scared them to the point they bought us.

So I get to the big company and there are a lot of smart people there, a lot of cool people, but I like to be able to control my destiny. I’ve worked startups and small companies the majority of my career. It’s what I enjoy. I felt being in a big company, I couldn’t—

John—You’d rather DO than MANAGE.

Mike—Yes sir! That’s exactly correct. And what happened was, I decided to leave Echo. And in one of these weird series of events, Lance Ennen, who is a lifelong friend of mine and a stupendously talented, gifted programmer, happened to call me that afternoon and say, “Hey, I got an idea. Let’s get together and grab a drink and talk.” We started talking and realized we had the same idea. I was in the process of forming another startup. He was thinking through Rocket Fuel. I realized that there were ways in which we could merge our idea. And so the big reveal is, Rocket Fuel Labs is trying to address what we see as a hole in the market.

Rocket Fuel Labs logo - Large

Lance is someone who, as a kid, got into developing video game design. Attended school to build video games. Worked at Midway, a big design shop. Worked on Mobile Combat. But he was on the design piece. Guys that were programming—that’s where the real money was, where the real challenge was. That was the exciting part. So Lance, over the past 7-10 years, transitioned over to development. Now, if you search for Ruby on Rails Programmers on Google, the first one you’re gonna find is Lance Ennen. When it comes to Ruby on Rails, which is kind of the Chicago school of programming, one could say he’s definitely one of the foremost authorities on the topic.

John—What did you think about the prospects of starting a new venture in Chicago?

Mike—I lived in Boston for two years when I was with Open Mile. And you look at the sophistication of that startup ecosystem, you look at the sophistication of investors, you look at the sophistication of entrepreneurs—at the time, the ecosystem was much more mature there. I left Chicago in 2010 for Boston and what’s amazing now is how much the startup ecosystem here has exploded since then. Groupon is—I credit Groupon with a lot of it…

John—Did you see my logo? “Chicago is the World.”

Mike—It is. And we see it and it’s amazing.

John—It’s because adversity breeds creativity.

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Four Stages of Development

Mike—I would say adversity breeds camaraderie as well. I’ll give you an example: I used to do a lot of technical ice mountain climbing. I climbed McKinley in Alaska, Gannett in Wyoming. When you take kids out there and you train groups, you do Tuckman’s four stages of group development:

1.) Forming—The individuals start to get used to each other.

2.) Storming—Individuals may challenge your authority.

3.) Norming—The group really starts to come together.

4.) Performing—They’re ready to conquer a challenge together.

When you think about adversity; when you think about startups; when you think about groups as a business, Rocket Fuel, I think, is past norming and I can’t wait till we hit performing.

Eisklettern_kl_engstligenfall - Wikipedia

But to your point, Chicago has exploded. I think about the city I left in 2010. This didn’t exist (he waves an arm, indicating the 1871 incubator where we’re talking), the skilled people weren’t evident, the infrastructure didn’t exist, investors weren’t here—they were looking to invest in real estate, franchises and dry cleaners. And now you have investors say, “Wait. I see the potential!” Ideas don’t have to be good or crazy—we need to find entrepreneurs that can execute and some of these things are doable. The payoff, if you get it right, is tremendous. The risk is there but the reward is also there.

John—Chicago is a good cross section of company types. It’s not all mobile apps. It’s tech-enabled industry, too.

Mike—Exactly. And that’s what we love about Chicago as a city. You look at Boston: Overwhelmingly you see healthcare. You see enterprise. You look at San Francisco: It’s overly consumer. It’s overwhelmingly mobile.

In Chicago—you look at the businesses that are here—from real estate to advertising, to trading—there’s a lot of smart people here working on different things and there’s a lot of what I call latent technology skill that’s just waiting to get deployed. And that gets us excited. And that’s where we think Rocket Fuel Labs can really be a game-changer. We’re operating between incubator, startup services, and technology support.

A lot of entrepreneurs have an idea and don’t know how to execute it. You look at DashFire, a company that helps entrepreneurs visualize their MVP (Minimally Viable Product). We see that as cool, but we think there’s more than that. If you have a technology stack and you think about each of your team members, there has to be more.

For instance, my background spans across managing sales teams, designing product, designing process, management consulting. I think any startup needs some variation of those skills.

I look at my partner’s skills and I think, “I’ve got one of the best developers around, who’s also managed teams of developers. Who’s able to be a thought leader, an evangelist, and a really bright light in the space for our technology.”

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The New Venture

John—Okay I’m lost. Are you telling me that you’re something like an accelerator or are you telling me that you’re somebody who provides talent for startups?

Mike—We’re more the latter than the former. We have expertise in startups. Our expertise is typically in the form of services, so what that means is we can deliver a team that can deliver a product. I can help you through a customer development exercise or help you through a product development exercise.

The challenge is, in Chicago there are a tremendous number of startups that can’t afford us that we’d love to help. When we look at the investor community, we say, look—we’re meeting with awesome entrepreneurs every day. We’re entrepreneurs and we know what makes a successful entrepreneur. In ten meetings a day one or two of them—and that’s a good ratio—one or two make you think, “Wow, I’d seed this if I could.” What we’re trying to do is build a development studio that hires the best developers in the world because we can retain them, because we have awesome projects. The prerequisite is that we have awesome projects.

John—So you develop for this company, then that company. So you might have 3, you might have 10 on your team. It’s a boutique outsource approach to an accelerator.

Mike—Yes. Yes, that’s exactly right.

John—Okay, then you’ve got all the services and the talent pool and you’re looking for these tremendous ideas that need that kind of help. Do you help raise their money?

Mike—That may be the next leg in our stool. Right now, we’re getting deal flow. Entrepreneurs come to us and the most common thing we hear is, “Hey, would you be my interim CEO?” or, “Could you be a consultative CEO?” Our long-term goal is to be able to help incubate those startups ourselves. As we build our brand, that’s something we think is a tremendous opportunity. But that’s long term.

I’m a big believer that focus is not about saying, “Yes,” it’s about saying, “No.” We don’t want to take on more than we can handle. My firm, adamant business philosophy is that I sincerely and always want to under-promise and over-deliver.

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GO TO PART 3 – TAKING IT APART

BACK TO PART 1

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Contacts

Rocket Fuel Labs

  • Specialties – Startups
  • Industry – Computer Software
  • Type – Privately Held
  • Company Size – 1-10 employees
  • Founded 2013
  • Expertise – Web Development & Deployment, UI/UX, Online Marketing, Product architecture, E-Commerce.
  • Headquarters – 222 W Merchandise Mart Plaza #1212 Chicago, IL 60654 United States
  • Website – RocketFuelLabs.com
  • Email – Info@RocketFuelLabs.com
  • Phone – 855-4FR-LABS
  • Fax – 312-620-9655

Photos courtesy Rocket Fuel Labs, NASA, National Geographic, Wikipedia, John Jonelis

Chicago Venture Magazine is a publication of Nathaniel Press www.ChicagoVentureMagazine.com Comments and re-posts in full or in part are welcomed and encouraged if accompanied by attribution and a web link . This is not investment advice. We do not guarantee accuracy. It’s not our fault if you lose money.

.Copyright © 2013 John Jonelis – All Rights Reserved

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Filed under 1871, angel, angel capital, angel investor, big money, Biography, Chicago Venture Magazine, Chicago Ventures, city, Entrepreneur, Entrepreneurship, Innovation, Internet Marketing, Invention, investor, new companies, Think Tank, vc, venture capital