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, 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, hand 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 start up CEOs and I knew the right answer. How in 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 I P O 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
I P O 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 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 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. We'll, 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? 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 two, 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 shares for free and for more gray 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.
