Transcription
How to answer five trick investor questions. I'll never forget it. The second I answered the investor's question, I wanted to take my answer back. I had stepped right into his trap, costing my company millions of dollars in funding, and the worst part was I knew better, and I still screwed up. I don't want that to ever happen to you. That's why I'll teach you how to answer the five most likely trick investor questions you'll be asked.
In today's video, I'm going to explain to you what are the five most likely trick investor questions, and how you should answer these trick investor questions. I hope you like it. Hi, I'm Brett. On my channel, I help early-stage startup CEOs like you raise money and grow your startup. So if this sounds like you, then hit the subscribe button and hit the bell so you get notified every time I release a new video. Let's get started.
Let me start by continuing with the story. I already started my meetings with the partners of one of my two investors. The notorious Donald Ventures was already going poorly when Samir asked me this question, which is our first trick question, number one: What is your exit strategy? I'd seen this question asked a million times before to startup CEOs, and I knew the right answer. How instead of giving Samir the right answer, I fell right into his trap by saying, "I think with the diversified customer base we have that an IPO is possible." Oh, dear. Samir didn't miss a beat, and he said, "I think we should sell the company." Boom. I was already on the ropes, and Samir had knocked me to the ground.
Now, was my answer so bad? You wonder, don't you think the professional investors already know what the possible exits are for your startup? They do. If they didn't know that an IPO or an acquisition were possible, they wouldn't have invested. So Samir didn't need my help. Here's what Samir wanted to hear me say: "I'm focused on growing my company. The exit will take care of itself." If only I'd said that. It's such a simple statement that tells investors that you're focused on the right thing, which is building your company.
Let's move on to trick question number two. Why won't Google, Facebook, or whatever the equivalent is in your market, build what you're building? This is a classic question that almost every experienced investor asks you, and yet again, the investors know the answer. Of course they do. So why do investors ask the question? Because they want to hear your answer, and if your answer doesn't acknowledge that, of course, any large competitor has the ability to do what you're doing, then you've blown the answer. I used to get asked this question all the time when I was raising money. The first thing I would say is, "Acknowledge that, of course, our larger competitors have the ability to do what we're doing." The second part of the answer should say something to the effect of this: that it's cheaper for your competitors to just buy you than to develop the same thing you are developing.
Let's move on to the follow-on trick question number three. But what will you do if Google or Facebook enter your market segment? Of course, they're gonna ask this. There's an old VC saying that every answer leads to another question. So you just told investors that your competitors will not enter the market, but of course, investors who already know the right answer want to know how you will react. Your answer has to be around focus and execution. If you indicate that it will not happen, then you've lost. If you indicate that you'll have to change strategies, then guess what? You've lost. Again, the answer is to say something like, "What? I would say, this is our sole focus. It's just another market segment to our competitors. We have the best team pound for pound in the industry, and we will fight to the death to win."
Let's move on to trick question number four. For what valuation are you expecting for this round of funding? And the trick questions never stop, do they? How can asking you what your expectations for the valuation of the round be a trick question? But it is a trick question. Let me explain. Let me start by asking you this question: Who's done more negotiations for funding? You or the investor? Across the table, the investor negotiates for a living, and the first rule in any negotiation is to let the other side put down a price first. There are three possible things that can happen when you go first. Number one, you give a valuation that's too high, and you scare the investor away because they think you're going to be difficult to work with. Or number two, you give a valuation that's too low, and you cost yourself money. Or number three, you get it right. That's why you're better off saying something like this: "Well, let the market determine the valuation." Immediately, the investor knows you've been well-coached when you answer this way because the market, which is potential investors, will determine the valuation. And unless you have multiple term sheets, you have no leverage in the negotiation.
Now, let's say that you respond with the market answer above, but investors still ask for valuation. What do you do then? Then you give an answer like this: "I've seen companies like ours valued between price X and price Y." This answer gives you more flexibility, and at the same time, it answers the investor's question.
And now the final trick, question number five on our list. What keeps you up at night? It's another classic. The investor is literally asking you what worries you. If you answer, "Nothing keeps me up at night," you're in trouble because it's garbage, quite frankly. Now, if you answer, "Everything keeps me up at night," then you're in trouble again. But investors ask this question because you never know what you're going to hear. Now, you wanna get this one just right. So answer about the top one or top two things that you worry about, but not raising money. I might answer like this: "I'm worried about continuing to recruit top talent. Having said that, I have confidence in the team that we have that they're going to be able to continue to execute really well."
Now, if this content is resonating with you, then please hit that like button right now. Now, what did you learn from today's video? Put your answer in the comments column below today's video, and if you have any questions, put them in the comments column too, and I'll be happy to answer them for you. Now, I have one more thing for you today. It's my free startup pitch deck template. It has all the slides you need to develop an awesome pitch deck. Click the link below today's video, and it's shared for free. And for more great content, click on the video at the end of today's video. And if you haven't already, then click on the subscribe button to get notified every time I release a new video. I'm brett@brettjfox.com. Thanks for watching today. Take care. Bye.