In Part 1 of this piece, we addressed the first five toughest questions asked of startup founders. In this piece, we will drill down on the second five toughest questions. With a little preparation and forethought, you can avoid getting stumped and communicate complete confidence in yourself and your startup.

6. What are you going to do if X moves into your space?

Context: The questioner wants to know if you know that you are but a guppy in an ocean of whales, sharks and big fish. Every early-stage growth company is swimming in a sea of predators, but have yet to become lunch. No matter what size pond you are swimming in, eventually the big fish will show up.

In my day, every single investor would ask, “What are you going to do if Microsoft moves into your space?” Because back in the day, Gates and team were relentless and ruthless in all things tech. If any player was getting traction in a space that might threaten their franchise, they could turn on a dime. Just ask Netscape (oh, they are not around any longer!)

Today, investors envision how Google, Amazon or Facebook might make your startup irrelevant in the blink of an eye. Every growth startup with its sights on becoming a $100M+ company, will eventually become a target. Investors want to know if you are thinking about this inevitability and how you will respond if or when it happens.

Answer: The worst answer is a dismissive one. When asked this question, lots of founders say that the big fish aren’t interested in the space, or won’t be able to compete. But investors know that whales like Google can compete with whomever they want. Hey, if your opportunity is as big as you say it is, then it’s only a matter of time.

So, the best way to answer this question is by saying how much you are looking forward to that day. You want to say that you are anticipating it, which is the same as saying you are executing so well, it will be inevitable. That’s music to an investor’s ear. And what you plan to do about it depends upon whether you want to partner, become a unicorn, go public, or be acquired. All those possible outcomes are perfectly fine with most investors. If you’re really smart, you’ll add, “We hope to have the right investors who will help guide us when that time comes.”

7.  How much capital has been invested in the company to date and what is your valuation?

Context: No investor wants to be the first money in. Some say they do, but they are lying. Every investor wants to know the founders, their family and friends, and possibly other angels or VC’s, have put skin in the game. The amount of money that has been invested to date in your startup says A LOT about its viability and future prospects. How much has been invested and the current valuation also informs an investor whether they want to play. The deal may be too early, or too late for their sweet spot. Why waste time on either side? The answer to this question also informs investors whether you understand how venture financing works, or have a pie-in-the-sky idea of your worth. I’ve literally had startup founders tell me that no capital has been invested (just sweat equity) and they have a $10M valuation. This is usually the place in the conversation where I tell them I hope they have a rich uncle, because no sophisticated investor is going to take them seriously.

Answer: There is no getting around telling a smart investor (or customer, or partner) how much capital has been invested. If you dance around this part of the question or refuse to answer it on some bogus confidentiality grounds, they will immediately write you off as a pretender, with no future prospects. Just state the amount, but also elaborate on the value of sweat equity and in-kind services your venture has received.

In one of my ventures, no capital had been invested (me and my co-founders had no money), but we were able to show that the value of the sweat equity and in-kind services we had received from vendors and advisors was at least $500,000. We were able to raise $1M at a $3M valuation. Most investors will discount sweat equity, so be prepared to make a solid case for the value your company has received in forms other than cash, and be prepared to defend a reasonable valuation based on team, traction, unique IP, and other “value” you have created.

Answering the part about valuation depends upon what stage you are in and how many rounds of financing you have closed. Early stage startups often raise capital using a SAFE or convertible note, so the answer is easy: “The valuation has not yet been set and will be done so by the lead investor in our upcoming priced round.” If you have already closed a priced round, simply state the post-money valuation, but qualify your answer by suggesting the lead in the current round might get a discount, or warrants, or some other sweetener. If you haven’t yet done a priced round, the best of all answers is this: “We realize the lead investor in the round will set the valuation.”

Smart founders never tell smart investors what their valuation is, they let the investors tell them – and then they accept it, argue for *slightly* higher, or walk away.

8. What are you going to do if you don’t hit your revenue target and/or can’t raise capital?

Context: This question is all about Plan B. It’s about probing to see if the founders have contingencies. The founder of Theranos, Elizabeth Holmes, was famously quoted as saying, “I think that the minute that you have a backup plan, you’ve admitted that you’re not going to succeed.” That’s total BS and perhaps the stupidest thing any startup founder has ever said. Things didn’t end well for her. EVERY company, from the lowliest of low startups to the mightiest Fortune 100 companies, should have contingency plans. Investors want to see what you will do when things don’t go according to plan (and they rarely do).

Answer: How you answer this question depends upon your stage and your options. The only wrong answer is saying “that won’t happen.” You can bootstrap, you can license, you can sell, you can offer customer incentives to drive revenue, or offer sweeteners to close a round that is lingering. You have all kinds of options. Lay them out as plan A., B., and C. Make it clear that one way or another, you will keep the train on the rails and steaming forward.

9. Do you think you’re the best person to lead the company in the long run?

Context: This question is designed to test your ego; to see if you know what you don’t know. It’s a very common question asked by investors. They want to make sure you are not going to get in your own way; that you will place the interests of the venture above your own selfish interests. They want to make sure that you understand that the minute you take outside money, the company is no longer yours, even if you control 51%. Every entity will protect itself, even from those that created it.

Answer: There is only one acceptable answer to this question: “I serve at the pleasure of the board and the shareholders. If at any time the majority of the board and/or shareholders don’t think I am the best person to lead this company, I will step aside.”

I got so tired of answering this question when I was raising money, I carried my letter of resignation with me. Whenever an investor asked it, I just slid the letter across the table to them and said, “All you need to do is sign it for it to become effective.” They all smiled and checked that concern off the list.

10. What keeps you up at night?

Context: Don’t mistake this for a throw-away question. It’s asked to test your temperament and thoughtfulness. It’s also asked to test your truthfulness and transparency. Smart investors will gauge how you respond, not just what you say. They are looking to see if you are being glib, or serious; dismissive or attentive. Your answer provides a clue as to your Emotional IQ and how self-aware you are.

Answer: There are no pat answers; no right or wrong answers. How you answer depends on how well you know the questioner, what’s going on in your personal life and what stage your venture is at. `What *really* keeps you up at night’ will always be changing based on your personal and professional circumstances. When I was asked this question, I liked to give both a personal perspective and one related to my startup. I would reply something like, “Well, my wife and I just had our first child, so middle-of-the-night feedings are quite common these days. In terms of my company, I toss and turn thinking about the next critical hires I need to make. But all-in-all, I sleep pretty soundly because I keep a daily `to-do list’ and feel like I have a good handle on what needs to be done every day — and in the right order.”

In summary, smart investors and other stakeholders will ask tough questions. In fact, it’s a good way to qualify them to see if they are serious and know what they are doing. You are not expected to have all the answers, or answers that the investors would like to hear. You are expected to have anticipated the questions and not be dismissive, or worse, make the answers up as you go.

Let’s turn the tables on this subject. Next up, we’ll discuss the Top 10 Tough Questions Startup Founders Should Ask of Investors. Stay tuned…

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