Building an early stage venture, also known as a startup, brings with it many challenges. In fact, there are several built-in paradoxes to entrepreneurship. You need to achieve some level of success so you can attract talent to join your team, but guess what you need in order to achieve success? Talent.
You need money to build a product but guess what you need in order to raise money, a product. You need value to bring users, but in most cases, guess what you need in order to generate value, users.
Entrepreneurship is not easy. If it was, everyone would do it. When it comes to the long journey of building a successful company, raising capital is one of the most significant milestones that you will achieve, not because raising external capital is ideal, it is always better to keep more of your company. However, once you raise significant capital, you have some oxygen to breathe and are able to validate your vision and begin executing on it.
When it comes to the process of raising capital, here are some questions and responses you often get from investors, including the best way to respond:
1. Who are your main competitors?
Any investor looking to deploy capital in a company will ask this question. Often times, the investor will actually have done the research before the meeting and is really only asking because they want to know how you will respond. Are you one of the entrepreneurs who genuinely thinks you have no competitors? If you answer the question with “We have no competitors”, just know, the moment you say those words, the meeting is officially over.
The right way to answer that question? Take out the landscape you built with fifty of your biggest competitors. When the investor asks “Who are you biggest competitors?”, your answer is “Here are my 50 biggest competitors.”
This shows that you came prepared to the meeting, that you are a responsible entrepreneur, and that you know what you’re up against.
2. You are too early, come back with traction.
This is probably the most common response early stage entrepreneurs get from investors. After all, the more traction you have, the lower the risk for the investor. Traction means you have found product market fit, or at least the beginning of it.
Here is the thing with this response, it is often not genuine and used as an excuse to say no without saying no. As an entrepreneur, it is your job to differentiate when the investor is being genuine and when you are just being pushed away.
If this situation is the former and the investor thinks you are genuinely too early for them, then your response should be “Thanks for the feedback, can you give me a specific milestone that you want to see me hit before considering this for an investment?”
This response shows that you accept the feedback and have every intention of coming back once you have the necessary traction. Responding this way illustrates how mature and open you are as an entrepreneur and also communicates to the investor “I am in this for the long haul. I will be back.”
3. Too many have tried and failed.
This response annoys me. “If so many have tried to solve this problem, what makes you think you can do it?”
My response: “So many are trying to cure cancer. Should we just give up?”
“So many tried to crack search before Google and mobile before Apple and social before Facebook. Should they have given up?”
4. Why can’t anyone just copy you?
Yet another question investors often ask that really has no basis. Look at all the winners. All they did better was execution. Almost none of them had a legal barrier. They either were first to market or just did it better than anyone else.
My response to this question: “They can. Bring it on.”
5. What is your technological barrier to entry?
“What was Facebook’s technological barrier? Uber? Twitter? And the list goes on. Today, technology doesn’t win. Execution does.”
Bottom line, investors say the darndest things, but if you want them to take out their check book, you are going to need to prepare yourself and know how to respond.
Extracted from Inc Magazine.