How 90% of Founders Completely FAIL One of the Most Common Investor Questions
If you’re an entrepreneur who will at some point raise money, you know that you’ll need to answer the question “How will the funds be used?”
This is an opportunity for a founder to set him/herself apart from the dozens of other deals an investor is currently looking at, but 90+% of founders neglect to take advantage of that opportunity.
Without fail, there are two ways this question is always answered. It’s either…
a) $X will go towards marketing, $Y for sales, $Z for R&D, $__ for [fill in the blank expense]
b) It will achieve [insert major milestone]; completion of [insert major initiative]; placement in X number of stores; etc.
Which answer do you think gets an investor more more excited?
B, of course. But 90+% of founders answer it more similar to A.
Let’s talk through an example…
Suppose Founder A (Alvin) is pitching you for $2M. He tells you that $400k will go towards sales efforts, $400k will be use to buy inventory, $800k will be spent on marketing, and $400k will go towards headcount.
Now suppose Founder B (Billie) pitches you for $2M as well. Billie tells you that $2M will get the company’s products into 5,000 more doors, will bring a new product to market, will allow the company to stand-up an industry-leading ecommerce site, and will deliver a field-marketing campaign to increase existing product sales velocity to X.
Suppose I told you that Alvin and Billie will be spending the money on the exact same things! Billie was just way more strategic in how she’s thinking about it and talking about it.
If you’re an investor, which founder is more appealing?
I’m putting my money into Billie.
So while at some point you’ll likely need to explain how the money will be spent (i.e. the expenses), if you, first, confidently explain the results/milestones you’re going to achieve with the invested capital, it’ll make the discussion around how you’ll spend the money a much more engaging discussion with investors. It will make that part of the conversation go more smoothly.
This type of response will also start to align expectations around where the company will be by the time you need to raise another round.
I learned this the hard way when I pitched a past startup of mine to a major VC. I had my pitch down pat. Unfortunately, I trained myself to answer the use of funds question using a typical use of funds chart on how I would spend the money. The VC kept asking me what the money would get the company, what the money would get him. I didn’t prepare myself to talk about use of funds in terms of results achieved. I floundered. Needless to say that investor passed.
So if you ever plan on raising money, always frame your answer to the question “How will the funds be used?” around what results you’re going to achieve and what milestones will be accomplished with the investor’s money. You can always go into how you’ll spend the money after that.