The Elephant in the Room
Every startup has one. In fact, every startup has many.
The proverbial “elephant in the room.”
idiom
a major problem or controversial issue that is obviously present but avoided as a subject for discussion because it is more comfortable to do so
I’m referring to the questions that you desperately hope an investor won’t ask you during a fundraising meeting. You know the ones, those questions that don’t have easy answers. The ones that you can’t point to a number or a chart or your resume to make go away.
The ones that late at night, as you lie awake in your bed whisper to you, “…what if they’re right?”
Ok, maybe that last part is a little over-dramatic. The fact is, every startup has its fundraising elephants. Questions that aren’t easy to answer manifesting as objections that aren’t simple to overcome. For some startups, they’re about market size. For others, they focus on competition. In many cases, you might not even see the elephant sitting right beside you.
So what can you do about it? How can you make your fundraising elephants go away?
Step 1: Find the Elephants
The first thing you need to do is identify all of your fundraising elephants.
Start with the elephants you know about. The questions you desperately hope that an investor won’t ask you. Be honest and harsh with yourself — what are all the holes in the market, the business, etc.?
Next, go to your trusted circle of founders, advisors and investors. Ask them what your biggest weaknesses are. The most significant risks they see in your company. In the case of your investors, ask them the most likely reasons they think you will fail (trust me, they’ve all thought about it).
Finally, reach out to a handful of investors who aren’t familiar with your company and either share your deck with them or ask them for a call/in-person meeting to share your story *. Ask them the same questions: what are their biggest concerns? Why would they not invest? Why do they think you will fail?
This can be a very humbling experience, but it’s incredibly important. You want these people to tear you apart. In some cases, they will identify risks you haven’t even thought about because you’re too close to the business. In others, they will highlight risks you are overconfident about or have internally downplayed.
* This can be done as part of a “dotted line” meeting, with friendly investors you know, or with “lower tier” investors you don’t plan to raise from.
Step 2: Name the Elephants
At this point, you should have a fairly long list of risks (if not, you aren’t trying hard enough).
Group them together into categories such as market risks, competitive risks, execution risks, team risks, etc. Then, formulate specific questions that capture their essence. Here are some examples:
Why will you succeed when all of the companies who tried this before failed?
Isn’t this a niche market?
Company X is 2 years ahead of you and raised $100M in funding. How could you possibly beat them?
You’re a first-time founder with no sales experience, how are you going to get your first customers?
If you’re doing this effectively, every question you write should make you cringe a little. They should feel as though the reader is unfairly judging you, making uniformed assumptions, or even asking lazy questions. You should feel a mix of defensiveness and frustration when you read them.
If you don’t feel that way, then these aren’t your elephants. Dig deeper.
Step 3: Conquer Your Elephants
Once you’ve named all of your elephants, it’s time to conquer them.
The first step is to come up with concise, effective answers to each of the questions/objections they represent. Iterate on these responses with your advisors to make sure your responses address each question in a convincing way. You likely won’t be able to fully “overcome” each of the objections, but your responses should clearly indicate your thinking.
Once you’ve got your responses, decide how to incorporate them into your pitch. There are three ways to do this:
1. Add them to your pitch deck
The first way to conquer your elephants is to tackle them head-on by incorporating them into your pitch deck. In some cases, this can be done subtly (e.g. tweaks to your market sizing slide). In others, it can involve adding an entire slide dedicated to the elephant (e.g. “why we will beat Competitor X”).
2. Pre-canned responses
The second way to overcome your elephants is to practice verbal responses to the questions/objections they represent. Turn your written answer into concise (1-2 sentence) verbal responses. The goal is to know exactly how you’re going to answer these questions when they come up, instead of ad libbing on the spot.
3. Fundraising FAQ
The final strategy is becoming increasingly popular due to its effectiveness and the confidence it projects to potential investors. Take every single one of your elephants and your written answers and put them into a “Fundraising FAQ”. At the end of your initial meeting, tell the investor that you’re going to send them the FAQ with answers to the most common objections raised about your company as a follow-up to the meeting.
This often catches investors off-guard (in a good way) and always leaves a strong impression.
For many founders, avoiding the elephant in the room can spell disaster for a fundraising process. Spending sufficient time before you fundraise to identify them, describe them, and effectively overcome them can dramatically increase your success rate.
