Real Talk: 10 Important Questions For Founders
Throughout my time at Dorm Room Fund, I've had the opportunity to learn from some of the best venture capitalists in the industry and to observe and conduct countless diligence meetings. As venture capitalists, a large part of our time is spent talking to founders. After many conversations and much experimentation, I’ve created a list of 10 questions that I’ve found to be effective at maximizing time spent with founders. This is important to the team at Dorm Room Fund, because we’re passionate about providing resources to early-stage founders and aspiring venture capitalists. We hope that reflecting on the following questions will help founders more effectively convey the “who, why, and how” of their company while enabling investors to ask better questions, get better answers, and make better investments.
Note: The order of these questions may vary based on the natural flow of conversation with a founder.
1. What Do You Understand About This Problem That Nobody Else Does?
This question should allow you to identify the founder’s unique insight into the problem they are solving. They don’t need to have experienced the problem first hand, but they need to have an earned secret. A founder who cites third-party research when talking about the market for eldercare has a much different level of insight than a founder that spent three months residing in an assisted living community. Unique insight is valuable because it can allow for sustainable differentiation. This question should also help determine if this founder is the best person to solve this particular problem and if they can succeed where others may have failed before. Without a unique insight, it will be hard to win a market.
2. What Is the Change Event (Technological or Otherwise) That Makes This Possible for the First Time?
This question should provide you with context on what has shifted in the market that allows this solution to be viable now, when it wasn’t before. Does it leverage a platform shift? If not, are users desperate for a solution to this problem? If there isn’t a strong impetus or sense of urgency, it will be harder to convince those critical first users to adopt this solution. At a minimum, the path to product-market fit will be longer and slower.
3. If You Could Only Run One Test to Evaluate One Assumption, What Would it Be? How Would You Design That Test?
Founders don’t usually expect this question, but it generally results in answers that highlight the largest uncertainty and pinpoint the biggest risk to viability for the current business. Once you identify that risk, it’s then possible to form an opinion about how difficult it will be to mitigate. This question should also provide information about how the founder thinks about testing their own assumptions, how open they are to disproving them, and how creative they can be with constrained resources in designing tests that allow them to iterate quickly.
4. What Is Holding the Company Back Right Now?
This question should illuminate the current constraints on growth and enable you to observe the founder’s thought processes. It should permit you to evaluate how they approach challenges and how adept they are at identifying creative solutions. A strong answer should give you confidence that the founder will make the right calls in tough situations and will know when and how to manage a pivot. This question should also let you gauge whether or not your particular fund will be able to help this founder overcome these challenges and get to the next milestone. If you’re not the best partner to help them, introduce them to someone who is. Make sure this meeting is worth the founder’s time.
5. If You Could Remove One Player From the Market, Which One Would it Be?
The focus of this question is not to assess competition but to learn how the founder defines their market. Startups rarely fail as a result of competition, but being able to clearly define a market and the company’s distinct value proposition within it should make it easier to succeed. This question will permit you to determine whether they are more focused on disrupting incumbents or are more concerned about other startups, and which ones. It should enable you to clearly see whether they compare themselves to companies that are great at retail, logistics, or creating a marketplace, for example. Once you have this answer, you can determine whether their product-market vision is clear and cohesive and whether they have a team that is equipped with the corresponding competencies.
6. Who Is on Your Team and Why?
The “why” is the crucial part of this question. Asking the question in this way moves the conversation away from “I have a business background and my co-founder is technical” towards “my co-founder is in charge of content because she spent 10 years leading content acquisition at Disney and she’s not afraid to pull an all-nighter when we need to get stuff done.” This type of answer not only tells you about the team members’ strengths and character, but the way the founder describes the other team members can provide information about team dynamics.
7. Who Will Be Your Next Hire?
This question should tell you where the current team may be weak and how realistically the founder assesses those weaknesses. Follow-ups should focus on their ability to recruit people to work towards their vision. Dig into how they have recruited thus far and how they plan to recruit in the near future. Hiring can be one of the most time consuming and difficult jobs of a founder. Do they think about leveraging unique networks to recruit underutilized talent currently working at top firms, or do they plan to recruit via common channels and broad outreach? Being able to recruit top-tier talent is critical to a startup’s success. Recruiting is all the more critical early on as the first ~10 employees will play a large role in setting the company’s culture.
8. Where Are You Getting Pushback From Potential Customers and Investors?
Asking this question should result in answers that touch on the company’s toughest challenges, how hard the sales process will be, and how likely the company is to be able to raise follow-on funding. Once a venture capitalist makes an investment, they should provide active portfolio support, aiding the founder in building the business and closing their next round. It’s important to determine how much time and energy this will take and to assess whether you have the capacity to follow through. This question should also give you insight into how other investors are viewing the business and the team, which will help further inform, test, and challenge your own theses.
9. How Will This Next Round of Financing Get You to Your Next Milestone?
This question should help you determine whether venture investment is appropriate, given the characteristics of the business and the founder’s goals. Try to determine whether they have maximized all the resources they already have, what this funding will allow them to learn, and whether or not they think of this company as a billion-dollar business. Venture financing may not be their best option.
10. What Would You Be Doing if You Weren’t Working on This Startup?
Entrepreneurship is hard and the founders we speak to are talented, meaning they have a lot of other options for what they could be doing with their time. It is important to determine how hard they will fight for this dream, how desperate they are to solve this problem, and how bad they want this company to succeed. Of course, different backgrounds allow for different degrees of access to resources and lead to different tolerances for risk-taking. In instances where differing levels of privilege may impact a founder’s ability to commit fully, the distance traveled with limited resources may be a better measure of the founder’s drive to make their dream a reality.
Throughout this process, see how the founder reacts to both pushback (challenge them on something) and feedback. Being able to receive and incorporate feedback quickly and with limited ego can be one of the strongest positive signals.
After answering all these questions, identify the 3–4 assumptions about the state of the world that need to be true for this company to work and/or for a potential investment to be successful. Then ask yourself if you believe that those assumptions are true, or will be in the next 1–3 years.
This list is by no means exhaustive and any diligence process should focus on more quantitative aspects as well (lifetime value/customer acquisition cost, retention rate, burn rate, etc.) However, we hope these 10 questions serve as a useful resource for developing an informed answer about whether or not it makes sense to move forward with continued diligence. At Dorm Room Fund, we believe: better questions lead to better answers, which lead to better outcomes for both founders and investors.
These ideas were developed as the result of conversations with or talks given by Phin Barnes, Hayley Barna, Brett Berson, Chauncey Hamilton, Ann Muira-Ko, Gus Warren, and Larsen Jensen. Thanks to Shohini Gupta for additional feedback.
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