Top 10 Toughest Questions Asked of Startup Founders (and how to answer them): PART 1
Of all the roles a startup founder must assume, one of the most important is that of A.I.C – Answerer In Chief. Founders will field a never-ending barrage of questions from smart investors, as well as from prospective customers, suppliers, partners and key employees. How founders answer these questions will determine whether they will get buy-in from these important stakeholders. There are ten questions in particular that are tough to answer.
In my experience, most first-time founders either try to B.S. their way through tough questions, or simply stutter and stammer through bad answers. I was one of those newbie founders at one time. These days, I take a little perverted pleasure in watching startup founders squirm when I ask them these questions point blank. So, in the interest of soothing my guilt and contributing to the advancement of newbie startup founders, allow me to share some ways to handle some of the toughest questions.
Caveat: Theses questions and answers apply more to early-stage growth startups, which means you have a “real” business. You have a functional product, you’re in the market, and at least have a growing user base, if not real customers and revenue. If you’re still at the idea or pre-launch stage, you’ll need to answer a completely different set of tough questions. I’ll try to cover those in a future post.
Tips for Answering Tough Questions
The first tip is that you are not expected to have all the answers, or answers that you know will please the questioner. Tough questions don’t always have good answers. Acknowledge the validity of the question and let the questioner know you will need to think about it, or assemble the correct data. Whatever you do, don’t try to B.S., or worse, out-and-out lie. Smart people will out you in due time (called due diligence), and you’ll never get another opportunity with them again.
The second tip is your answers should be adjusted depending upon whom is asking. How you answer these questions with prospective investors will be different than how you answer them with prospective customers or employees. For the purposes of this piece, we’ll assume the questioners are investors. (By the way, it is not unusual for astute customers, partners and employees to ask these same questions. Don’t be taken aback or offended if they do. In fact, they are the smart ones – the ones you want on your team. They are in essence “investing” in you in a different way. Expect these questions and adjust your answers to them appropriately.)
The third tip is to provide short, concise answers to tough questions, then follow-on with a question of your own. Try to qualify the interest and relative value of the questioner. Try to ascertain what they are driving at. No need to answer tough questions with non-qualified people, right? Make them sell you that they are worthy of the answers.
With that, let’s layout 10 of the toughest questions asked of startup founders. I’ll try to give each a little context, so you can understand their intent and what the questioner is really snooping for. I’ll suggest some ways to answer these questions in a way that will be appreciated and, hopefully, well received by the questioners.
Top 10 Toughest Questions Asked of Startup Founders
1. How many customers (users) do you have and how much revenue are you generating?
Context: This gets right to the heart of your start. They want to know right out of the Shute whether you have a real business, or are still in the aspiration stage. They want to know if you have achieved product-market fit. They want to gauge how far along you are; your company’s size and traction.
Answer: If you’re crushing it, proudly give them the numbers and reiterate you’re still early and expect to continue to grow exponentially in the years ahead. If your numbers are sensitive and you haven’t qualified the investors as to their interest and appetite, simply say, “We don’t disclose our numbers until we have qualified an investor’s interest, but I can tell you we are generating revenue and our user base is growing. Have you previously invested in this space and what is the size of your typical investment?” Note how you turn the tables on the investor and you become the questioner!
If you’re post-launch, but pre-revenue, simple say you are still focused on creating referenceable accounts and refining the revenue model, but expect to start generating revenue within x months. Reiterate that building a large, sustainable user base, is more important than generating revenue at this stage. This is a good opportunity to summarize your long term revenue model. Is it pay-per-unit, subscription, advertising, data or lead generation? Relay how many customers represent critical mass and when you expect to achieve critical mass.
Not all investors expect you to be making money, or even generating revenue yet, but they want to know you are clear about how the company will capture market share and monetize those users in the long run.
2. What’s your cash position and burn rate?
Context: This is a typical follow on question to number 1 above. After they know how much revenue you are generating, if any, they want to know how much cash you have in the bank and how quickly you are spending it. They want to know when you are going to be out of money; how desperate you might be. Your burn rate also gives them an indication of the scale of your enterprise. A company that is burning $1M per month is a much different animal than one burning $100K per month. The answer will tell the investors everything they need to know about how early (and vulnerable) you really are.
Answer: Unless you are far down the path with an investor who is seriously interested in writing a check, the best way to answer this question is by stating your relative runway. You can answer something along the lines of, “We have enough runway for at least 12-months, based on our current burn rate.” Make it clear that the founders or current investors are committed to funding the company through break-even, or until closing a substantial funding round. Your answer should signal your intent to dramatically increase both your cash position and your burn rate.
3. How many full-time employees do you have and what do you expect your headcount will be this time next year?
Context: This question is often asked to test the veracity of your answers to numbers 1 and 2 above. You need people to attract and serve customers, and to generate revenue. Your headcount should jive with your installed base and burn rate. Smart investors will do the math in their heads. If your customer base and burn rate don’t match your headcount, they will be suspicious. The number of people you expect to hire also provides clues as to your growth rate and funding needs.
Answer: There is no getting around this answer, which is why it is asked. There is nothing sensitive about how many people work full-time at your startup. If the number is low, or might make the investor question your answers regarding traction or burn rate, you might need to explain extenuating circumstances: outsource talent essentially dedicated full-time to your project; founders not taking a salary; or people working double-time for you in-between their daytime jobs. It’s no secret that “team” is one of the most important criteria of investors. Make sure your answer to this question reinforces the fact that you have (or will have) the quality and quantity of people needed to win.
4. How do you stack up against X and how are you going to compete against them?
Context: They want to know how you are going to thread the needle. They are fishing for a sustainable, 10X advantage. They likely already know who dominates your space – who the gorilla is. They want to hear how you think you compare, one-on-one, and your unique strategy for scaling against them and ultimately winning. Even if you have no direct competitor, investors want to hear how you are going to win over customers who are solving the problem you portend to solve, in a different way.
Answer: First of all, never brush off any competitor as being too big, too slow, or too clueless. It’s a common and arrogant position of first-time founders. Recognize every solution, even inferior solutions, as legitimate threats. It often works to say, “Our biggest competitor is not X, it is apathy (or laziness, or indifference, or ignorance, or some other user behavior inhibiting adoption).” Your answer should offer a compelling strategy that neutralizes solutions from other companies, while overcoming or changing the user behavior that is causing inertia in the marketplace.
5. What’s your primary competitive advantage?
Context: In question 4, they were fishing for contrast with a specific, dominant competitor. This question is designed to surface your secret sauce. They want to hear your unique insight, your inside track, your special access to the market, or your trade secret or defensible IP. They are snooping for barriers to entry your solution might create, or high switching costs that ensure customers are likely to stick with you.
Answer: Whatever you do, don’t say your competitive advantage is a patent, or a pending patent. Investors will yawn, seriously. This is a common mistake of first-time founders (one I made myself, BTW). Patents offer ZERO competitive advantage in the startup phase. They are easy to engineer around and even if competitors can’t engineer around them and infringe, it requires BIG money to defend. The BEST answer to this question is: “Our big advantage is satisfied, loyal customers.” Second to that answer, having some sort of special access to the market – a great channel partner, will do nicely. Saying you have a deal with Verizon, who is going to bundle your solution for its 146M customers, is worth more than any patent or other IP you have.
A third answer, behind loyal customers and special access to the channel, is “team.” A mediocre product with a great team will win over a great product with a mediocre team any day. So highlight your team, including advisors.
Okay, time for a break. Click here for Part 2, where we will address tough questions 6-10:
6. What are you going to do if X moves into your space?
7. How much capital has been invested in the company to date and what is your valuation?
8. What are you going to do if you don’t hit your revenue target and/or can’t raise capital?
9. Do you think you’re the best person to lead the company in the long run?
10. What keeps you up at night?
There are no tough questions if you are prepared with good answers.