Robert Hokin, Managing Partner at Greenbackers provides guidance on what questions VCs usually ask when on the hunt and evaluating new cleantech investments. Are you a founder with a compelling technology business and thinking about, kicking off or even struggling with a fundraising round? We’d love to hear from you. Get in touch! And check out our upcoming Pitch Event on May 29 at KPMG in London!
“Here at Greenbackers, we regularly see first-hand how venture capitalist funds make evaluations about whether or not to invest in startups. Much of the time, unfortunately, the answer is no. Now, don’t get disheartened! There can be many reasons for this, including whether the startup is within the firm’s focus, geographic range, or stage/amount of desired investment. But assuming your company IS within the investment parameters of a given fund, here are some determining factors for whether or not a venture firm might decide to invest in YOU.”
1. Is There a Great Management Team?
Many investors consider the team behind a startup even more important than the technology. Funds will want to know that the team has the right set of skills, drive, experience, and temperament to grow the business, so anticipate the following questions:
- Who are the founders and key team members?
- What relevant domain experience does the team have?
- What key additions to the team are needed in the short term?
- Why is the team uniquely capable to execute the company’s business plan?
- How many employees does the company have?
- What motivates the founders?
- How do you plan to scale the team in the next 12 months?
Ultimately, the investor, fund or committee will need to make a judgment about how the founder and team will be to work with. Does the investor believe in the team? Is the CEO experienced and willing to listen? Involving experienced advisors can be very helpful in the early stages to help bridge an early-stage team that is still growing.
2. How big is the Market Opportunity?
Most investors are looking for businesses that can scale and become meaningful, so it’s best you address this right up front: why your business has the potential to become really big. Don’t present small ideas. If the first product or service is small, then perhaps you need to position the company as a “platform” business allowing the creation of multiple products or apps. Investors will want to know the actual addressable market, what percentage of the market you think you can to capture over time and how you have validated this data. What’s ‘Big’? For most investors, the potential for in excess of $1 billion in sales annually.
3. What Positive Early Traction Has the Company Achieved?
One VERY important things for climate and cleantech investors will be signs of any early traction or customers. A company that has obtained market traction will be more likely to obtain venture financing and with better terms. Examples of early traction can include the following:
- The creation of a beta or minimally viable product
- Initial or pilot customers, especially brand name customers
- Strategic partnerships
- Customer testimonials
- Admission into competitive programs such as Y Combinator or other technology accelerators or incubators
Investors will want also to know:
- How can any early traction be accelerated?
- What has been the principal reason for the traction?
- How can the company can scale this early traction?
It’s great if you can evidence any early buzz, customer/trialist testimonials or press you have received, especially from prominent websites, corp[orates or publications. Feature the headlines in a slide on your investor pitch deck. List the number of articles, publications or client contact mentioning the company.
4. Are the Founders Passionate and Determined?
Many venture capitalists look for passionate and determined founders. Are they individuals who will be dedicated to growing the business and facing the inevitable challenges?
Here’s an opportunity to demonstrate that you’ve spent time looking up a fund’s background and investment portfolio finding mutual interests.
John Steedman, Partner at Greenbackers Investment Capital Partner comments: “I like founders who (a) know their metrics cold; (b) have a clear idea of the business they’re in; and (c) know how they want to grow it. What gets my attention is a hard-nosed, determined founder who, with a few operational pointers combined with a solid, already existing plan, can get to an even bigger outcome. That’s the kind of ride funds who we talk to really want to take.”
Andrew Smith, Co-Founder at Greenbackers adds: “Yes, of course you need to appear professional if you are going to be starting a serious business, but you also need to show some passion and enthusiasm. Startups are hard, they take a long time to gestate, and you need to show that you have the inner drive to get through the highs and lows. I don’t mean you have to jump up and down and wave your arms. More like, tell the story about what is driving you to get into your business, why it’s personal, or why there is nothing else you would rather do than spend the next 5 to 10 years living and breathing it.”
5. Do the Founders Understand the Financials and Key Metrics of Their Business?
Venture capitalists look for cleantech founders who, as well as the technology, truly understand the financials and key metrics of their business. You need to show that you have a handle on all of those and are able to articulate them coherently.
Mark Hannigan, Partner at Greenbackers, says: “Know exactly what you are going to spend your money on. Don’t tell us how long it will last; tell us what you plan to prove. The most impressive entrepreneurs communicate the value of their businesses through numbers. A conversation centred on a company’s revenue growth, sales funnel, and customer churn causes an immediate connection with investors because when entrepreneurs position themselves as metrics-driven, it’s as though they’ve entered an investor’s mind. So know your KPIs (Key Performance Indicators) forwards and backwards. Effective entrepreneurs understand what their top priorities are and manage their companies by focusing their teams around a handful of critical metrics that reflect those priorities. I’m always interested when a founder can articulate her KPIs, talk intellectually about his or her team executing to improve them, and has a clear sense of where those metrics can be in a year or two.”
6. Has the Entrepreneur Been Referred to Me by a Trusted Colleague?
Venture firms get inundated with unsolicited executive summaries and pitch decks. Most of the time, those solicitations are ignored. The way to capture the attention of a venture capitalist is to get a warm introduction from a trusted colleague: an advisor such as Greenbackers, a fellow entrepreneur, a lawyer, an angel investor, or even another venture capitalist.
7. Is the Initial Investor Pitch Deck Professional and Interesting?
The first thing the venture investor will expect is to see an investor pitch deck before taking a meeting. From the pitch deck, the investor hopes to see an interesting business model with committed entrepreneurs and big opportunity. So make sure you have prepared and vetted a great pitch deck. Looking at other pitch decks and executive summaries can help you improve your own. See our article on to Create a Great Investor Pitch Deck.
8. What Are the Potential Risks to the Business?
Investors are all about understanding what risks there might be to the business. They need to understand your thought process and the mitigating precautions you are taking to reduce those risks. There are risks in any business plan, so be prepared to answer these questions thoughtfully:
- What do you see as the principal risks to the business?
- What legal risks do you have? Will the business model comply with applicable laws, including expanding privacy protections?
- What technology risks do you have?
- Do you have any regulatory risks?
- Are there any product liability risks?
- What steps do you anticipate taking to mitigate such risks?
Startups that can show they have reduced or eliminated product, technology, sales, or market risks will have an advantage in fund-raising.
9. Why Is the Company’s technology or service great?
Entrepreneurs must clearly articulate what the company’s product or service consists of and why it is unique, so you should expect to get the following questions:
- Why do users care about your product or service?
- What are the major product milestones?
- What are the key differentiated features of your product or service?
- What have you learned from early versions of the product or service?
- What are the two or three key features you plan to add?
- How often do you envision enhancing or updating the product or service?
10. How Will the Investment Capital Be Used and What Progress Will Be Made With That Capital?
Investors will absolutely want to know how their capital will be invested and your proposed burn rate (so that they can understand when you may need the next round of funding). It will also allow the investors to test whether your fund-raising plans are reasonable given the capital requirements you will have. And it will allow the investors to see whether your estimate of costs (e.g., for engineering talent, for marketing costs, or office space) is reasonable given their experiences with other companies. Investors want to make sure at minimum that you have capital to meet your next milestone so you can raise more financing.
11. Is the Expected Valuation for the Company Realistic?
Tell an investor you want a $100 million valuation, when you started the business three months ago and don’t have much traction yet, the conversation will end very quickly. Often, it’s best not to discuss valuation in a first meeting other than to say you “expect to be reasonable” on valuation. But venture investors also don’t want to waste a lot of time on a deal if the valuation expectations are unreasonable or not attractive.
Valuation at an early stage of a technology company is more of an art than a science. To help bridge the valuation gap for early-stage startups, you often see investors looking for a convertible instrument with customary conversion discounts and valuation caps. These instruments, such as convertible notes and “SAFEs,” have become quite common. This can be a tricky area to navigate, so you may want to get some additional financial advice and support. Ask your Greenbackers contact, and we can signpost you to some, if that is helpful.
12. How Differentiated is the Technology?
An analysis of the startup’s technology or proposed technology is critical. The questions the investors will likely ask include:
- How differentiated is the company’s technology?
- What competitive advantages will there be over existing technology?
- How easy will it be to replicate the technology?
- How costly will it be to build the technology into each product?
13. What Is the Company’s Intellectual Property?
For many companies, their intellectual property will be a key to success. Investors will pay particular attention to your answers to these questions:
- What key intellectual property does the company have (patents, patents pending, copyrights, trade secrets, trademarks, domain names)?
- What comfort is there that the company’s intellectual property does not violate the rights of a third party?
- How was the company’s intellectual property developed?
- Would any prior employers of a team member have a potential claim to the company’s intellectual property?
- Is the intellectual property properly owned by the company, and have all employees and consultants assigned the intellectual property over to the company?
- If the intellectual property was developed at a university or through government grants or with open-source technology, how does the company have the right to use the technology?
14. Are the Company’s Financial Projections Realistic and Compelling?
In today’s market, if you’re presenting investors with projections showing the company will achieve $5 million in revenue in five years, don’t be surprised if they may not get overly excited. VCs want to invest in a company that can grow significantly. But show projections in which the company predicts to be at $500 million in three years, the investors will just think you’re dreaming, especially if you are at zero in revenues today. Avoid assumptions in your projections that will be difficult to justify, such as how you will get to a 400% growth in revenue with only a 20% growth in operating and marketing costs.
In order to believe your financial projections, investors will want you to articulate the key assumptions you have and convince them these are reasonable. If you can’t do that, then the investors won’t feel you have a real handle on the business. Expect that investors to push back on assumptions and they will want you to have cogent, thoughtful responses.
15. Is Your Legal Formation Clean and in Compliance with Applicable Laws?
Finally, investors don’t want to invest in a company that has legal issues with the founders or third parties, failed to properly issue stock or options, failed to make securities law filings, has unaccredited investors, or hasn’t complied with employment laws—these are all red flags.
Before pitching your business, you need to make sure the company is clean from a legal perspective. An experienced startup lawyer can help significantly. If you need one, reach out to the Greenbackers team and we can refer you. Good hunting!
As I said at the top of the article, we hope that this article gives you a good guide and understanding of what questions VCs ask when on the hunt and evaluating new cleantech investments. If you are a low carbon innovator with a compelling technology business and considering, kicking off or even struggling with a fundraising round we’d love to hear from you. Get in touch!
Robert Hokin is Chief Executive and Managing Partner at Greenbackers Investment Capital. Robert has spent the last 35 years in technology and finance with the last 20 in cleantech. He has coached and helped hundreds of companies in the raising of VC funding.
