Jason Calacanis is one of the top five angel investors in the world. He has funded more than 150 companies, including four multi-billion dollar "unicorns." Thankfully, Jason doesn’t keep his insights to himself - in his book Angel, he provides guidance to anyone willing to invest in startups.
Apart from investors, startup founders can also benefit from his advice and prepare for raising funds. As an expert in startup evaluation, Jason teaches tactics for spotting the best founders, which include asking questions, recognizing qualities, and reading signs.
Know these ‘secrets’ in time, and you will never feel unsettled or caught in the dark at a meeting with investors.
What Information Investors Want to Obtain
Before making an investment decision, Jason, as well as many top investors, wants to determine:
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Why has this founder chosen this business
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How committed is this founder
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What are this founder’s chances of succeeding in this business (and in life)
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What does winning look like in terms of revenue and investor return
In order to get a good understanding of the four points above, investors will go on a quest to know the founder that has caught their eye and they will often ask four types of common questions:
1.Rapport-Building and Introductory Questions
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How do you know [person that introduced you]?
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What are you working on?
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Why are you doing this?
According to Jason, the two worst answers of the question above are: “To make money.” and “Because Successful-Company-Name doesn’t do it.”
If you are building a startup only for money, you will eventually quit when you realize there are many better ways to make money. Alternatively, if you’re building something because another company doesn’t have this feature - you’re being naive. Most companies with descriptions like “Uber for shopping” or “Uber for food” will get crushed by Uber. This disposition indicates to an investor that you lack vision.
It’s okay to start small, but it’s not okay to be a small thinker. The right answers tend to be personal. Did you know that the founders of Uber built the app because they couldn’t get a cab in San Francisco?
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Why now?
For many investors, this is the most important question about the business because so many startups try the same ideas over and over again.
You must find a strong reason why this idea will succeed now. For Uber, it was because smartphones had become ubiquitous and had GPS. For YouTube, it was a variety of factors that came together at the right time: bandwidth costs plummeted after the dotcom crash, storage costs were dropping due to cloud computing, and blogging was taking off. Hence, YouTube offered a clever way to embed videos on websites for free.
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What’s your unfair advantage?
The startup founders that broke out often had an unfair advantage. Google had Standford connections to talented algorithm writing engineers. Zuckerberg launched Facebook while he was a student and used his understanding of campus culture to figure out his social network. Bill Gates’s mom was on the board of United Way with the CEO of IBM. They hired Microsoft to develop their operating system, and the rest is history.
To summarize: “What makes you uniquely qualified to pursue this business? What secrets do you know that will help you beat both the incumbents and your fast followers?” are pivotal questions that can shoot you ahead of the competition.
2. Tactical questions
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Tell me about the competition.
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How do you make money?
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How much do you charge customers?
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How much does your average customer spend?
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Tell me the top three reasons why this business might fail.
Here’s how Airbnb would answer these questions:
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Tell me about the competition. - Hotels and HomeAway are our two biggest competitors. Hotels and HomeAway are both much more expensive - typically two to three times more expensive than an Airbnb.
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How do you make money? - We take a transaction fee.
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How much do you charge customers? - We take 3% from the host and charge a 10% fee from the guest.
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How much does your average customer spend? - Our average stay is 1.7 nights, with a total charge of $225, of which we keep $40.
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Tell me the top three reasons why this business might fail. - Regulations are our biggest challenge, finding inventory is our second-biggest challenge, and having a consistent, high-quality experience is our third-biggest challenge.
Do you notice how tight and concise the answers above are? You should get to a point where you speak bluntly and objectively about your business with investors. We recommend that you practice answering these questions in a similar format with your peers and advisors in this format.
And here is an eloquent example of how NOT to answer the tactical questions:
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Tell me about the competition. - We don’t have any competition, except maybe someone putting their couch on Craigslist. No one is capable of doing what we do!
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How do you make money? - We take a transaction fee, we’re going to sell our data to marketers, and we’re going to sell our software. Plus, we’re going to have merch!
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How much do you charge customers? - A lot!
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How much does your average customer spend? - We had one person stay for a month, and this other host put their mansion on for $5,000 a night and sold it for ten days last month!
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Tell me the top three reasons why this business might fail. - There is no way we can lose. The only question is how big this business can be!
3. Personal Questions
Many investors may ask personal questions to understand what you’re about. Jason tends to ask questions like: “What did your parents do?” or “Tell me about your mom and dad?” He likes to ask questions like this because it helps him learn a lot about how much this company matters to you by understanding how you grew up. These inquiries can also be an indicator of your approach to startups. We recommend that you prepare a brief short story to discuss your upbringing and how it relates to your business.
Investors might try to sense if you will go without pay for months and request your team to take a 50% deferred salary once the money runs out. They also want to know if you will put payroll on your personal credit card to rescue the business. In other words, if you will go the distance.
Some indicators that signify that founders will not go the distance:
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If a founder starts discussing their compensation at a startup with “I would like to make as much as what Google just offered me”.
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Founders who have not quit their jobs.
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Founders who spend a lot of time at expensive conferences that will not directly result in landing investors, clients, or team members. (i.e. TED)
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Founders who waste money on their office space rather than their product.
4. Use of Funds Questions
Investors may sometimes ask you for your 'use of funds', i.e., how you will use the money they are investing in you. Do NOT answer this question by saying, ''we will spend 75% of it on salaries/product development''. Investors care a lot more about the results than about how you spend their money. If you are asked about the use of funds, focus your answer on results. For example, mention milestones you intend to hit and dates by which you will reach those milestones.
Bonus: Other Investor Questions
Investors may sometimes ask who else has invested in the round. This topic can be very powerful if you can advertise that an influencer is part of your round. However, do not ever let other interested investors know who else is investing unless both of these conditions are met: (i) the investor has wired the money into the company's bank account, and (ii) the investor has explicitly given you permission to use their name.
To be on safe ground in such a situation, you can use this answer:
"We're speaking with a number of investors, and we will share this information with everyone that has participated after the round has closed."
Before Completion
In short, maintaining efficient communication should be your top priority. Jason Calacanis believes that if a founder doesn't communicate with their investors, this is almost universally a sign that they are going out of business. Therefore, try to send out an investor newsletter regularly.
To test your communication level, investors will watch intently how you behave during a meeting and how you respond to questions via email.
Jason believes that the founders who are not concise in their communications will probably not do well in the long term. This is a sample of an email Jason would send to touch in:
‘'Nice start, couple of quick questions:
Revenue by quarter?
How long has the product been in the market (months)?
I’ve seen a couple of businesses in this space fail over the years - why will it work this time?’'
Efficient founders will provide a concise one-sentence answer to the questions above. (Please review the Airbinb example in the Tactical questions section above.) However, most founders will send a long multi-paragraph email that doesn’t answer the questions, as the founder goes off on a long tangent. This kind of behavior shows a lack of focus and poor communication.
Do you wish to drill deeper and gather more specific knowledge on fundraising? Take advantage of our useful fundraising tips and our regularly updated Benchmarks resource.
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