Investor Interrogation: Can You Take the Heat?
While usually not accompanied by waterboarding, the questions asked by potential investors in your venture are an attempt to size you up and see what you can handle. Are you as smart as they are? Investors will spend more time looking for a wrong answer than cheerleading for your dream. You may feel offended. However, this Shark Tank-style critique is a service. Even if the Shark is wrong, their skepticism on a specific matter may not be unique. If one person thinks there is a fatal flaw, others may have the same opinion. You can walk away impudent, or you can learn and figure out a better way to communicate your way past the skeptics.
The investor’s goal is to formulate a killer question that will end the conversation. It’s called “failing fast.” They anticipate passing on most deals, so the faster they find the fatal flaw in your deal, the faster they can move on to the next. The CEO or CFO’s job is to anticipate these questions and craft evidence-based rebuttals in advance. An expert consultant at Cayenne with decades of experience help prepare you this critical examination.
There are standard questions most anyone is going to ask, and there are deep-dive questions to determine if you really did your homework. If an investor asks if your product is compatible with an established, ancillary brand, your response will be more believable if an analysis is readily available, and it shows you already knew the question was important.
Take the time to document their ideas and priorities, even knowing that everything will change–often. This documentation can take the form of investor business plans, operating business plans, slide decks, pitch videos, and other investor relations (IR) material. Videos are the best way to stoke interest on crowdfunding sites. Slide decks are good for when your meeting is pre-arranged and you have more than 30 seconds to impress your audience. The executive summary and business plan will be the next step for prospects who want to know more; they can also back up your responses during a meeting.
All of these documents describe the organization, the market addressed, and how the company intends to provide a return to investors. You may need to define the target market more narrowly, but it is often the go-to-market strategy where subjectivity is introduced and the interrogation intensifies.
There are limitations to proving that a strategy is going to work prior to execution. Your ability to conduct detailed surveys, competitor intelligence, and focus groups is limited without capital. However, if you stretch your resources and time to the furthest extent possible, the investor will appreciate that you have done your best to reduce the risk in the deal.
If you sell high-ticket items, bona fide letters of intent from potential blue-chip buyers can go a long way towards reducing the perceived risk. If you sell low-priced items, measure and analyze the responses of potential consumers. Don’t just tell an investor: “Everyone I talk to loves the idea!” Put it in a spreadsheet. It won’t be a scientific study, but it will show that you have done your best to quantify the market’s appetite and communicate this information to investors as honestly and objectively as possible.
If a potential investor asks a question you cannot answer, rather than trying to counter it with your deep-seated beliefs, use it as an opportunity to draw the investor into the role of a mentor or advisor. Ask the investor what you can do to mitigate this risk or substantiate your opinion. While other founders competing for the investor’s capital may exhibit agitation that the prospect does not believe in their strategy, you can welcome a dialog that results in the investor tinkering with your idea. If you make it clear that you value an investor’s time as much as their capital, you’ll differentiate yourself from more myopic entrepreneurs. You may find that the capital will flow easier once angels have invested their time and are convinced you are a smart, honest and cooperative entrepreneur.