Chapter 1: Understanding Investor Trick Questions

I still recall the moment vividly. As soon as I responded to the investor's inquiry, I wished I could retract my answer. I had unwittingly walked right into his trap, which ultimately cost my company millions in potential funding. The worst part? I should have known better, yet I still stumbled.

During a meeting with the partners from one of my investors, the infamous "Donald Ventures," things were already not going well. That’s when Samir posed the first trick question: A. What is your exit strategy? Having seen this question directed at startup CEOs countless times, I was aware of the appropriate response. Instead of articulating that, I foolishly fell into his snare by stating, "I believe an IPO is possible due to our diverse customer base."

Without missing a beat, Samir countered, "I think we should sell the company." Just like that, I was on the ropes, and his words knocked me down. Was my response truly that misguided?

Professional investors are well aware of the potential exit strategies for your startup. If they weren't clued in on the possibility of an IPO or acquisition, they wouldn’t have invested in the first place. What Samir really wanted to hear was something along the lines of, "My focus is on expanding the company; the exit will take care of itself." If only I had articulated that simple yet powerful statement, it would have demonstrated my commitment to building the business.

Next up was trick question number two: B. Why won’t Google, Facebook, or similar giants in your market build what you are creating? This is a common query that seasoned investors love to pose, and once again, they already know the answer. So why ask it? They want to hear your perspective. If your response fails to acknowledge that large competitors have the capability to replicate your efforts, you’ve missed the mark.

When I faced this question in my fundraising efforts, my approach was twofold. First, I acknowledged that larger competitors could indeed pursue what we were doing. Then, I highlighted that it’s often more cost-effective for them to acquire a startup like ours rather than develop a similar product from scratch.

Moving on to the follow-up trick question number three: C. What will you do if Google or Facebook enters your market segment? Naturally, investors will ask this. There’s an age-old VC adage: "Every answer leads to another question." If you suggest that your competitors won’t enter the market, you’re likely to lose credibility. Likewise, if you imply that you’ll need to pivot your strategy, you’ve also lost their trust.

The ideal response centers on focus and execution. You might say something like, "Our primary goal is to succeed in this market segment. We have the strongest team in the industry, and we are committed to winning against the competition."

Now let’s discuss trick question number four: D. What valuation are you anticipating for this funding round? This may seem straightforward, but it’s a trap. Consider this: who has more negotiation experience, you or the investor? Investors negotiate for a living, and a key rule in negotiations is to let the other party state their price first.

If you go first, three scenarios can unfold:

1. You propose a valuation that is too high, scaring the investor off.
2. You suggest a valuation that is too low, costing you potential funding.
3. You hit the mark.

It’s far wiser to respond with something along the lines of, "Let’s allow the market to determine the valuation." This shows the investor that you’re aware of negotiation dynamics. Unless you have multiple offers, you lack leverage.

If investors persist in asking for a valuation after this response, you can say, "I’ve observed similar companies valued between X and Y." This gives you room to maneuver while still providing an answer.

Finally, we arrive at trick question number five: E. What keeps you up at night? This age-old question seeks to uncover your worries. Responding with, "Nothing keeps me up at night," is a red flag, while saying, "Everything keeps me up at night," is equally problematic. The goal is to pinpoint one or two concerns that don’t involve fundraising.

For example, you might say, "I’m concerned about attracting top talent. However, I trust our current team to execute effectively."

These are the five main trick questions investors are likely to throw your way. While there are many more inquiries that could arise, the key to handling investor questions is to get straight to the point and respond honestly.

For further insights, check out the following videos:

How To Answer Five Trick Investor Questions - This video explores effective strategies to navigate tricky investor inquiries, helping you secure funding.

The Five Steps To Answering Startup Investor Questions - Discover the essential steps to confidently answer investor questions and present your startup effectively.