As an entrepreneur you know that laser-like focus is what it takes to create something from nothing. Your relentless persistence often turns a “no” into a “maybe” and a “maybe” into a “yes.” Your ability to repeatedly muster the guts to take outrageous risks and ignore reality has been key to your success.
But that’s not enough when it comes to funding for your business. In fact, you often need to reverse your mindset and demonstrate your ability to be very realistic very quickly.
I’d love to tell you that financiers are eager supporters of entrepreneurs and can’t wait to write you a fat check. But this often isn’t the case. Cynicism and skepticism reign supreme. It’s hard to get a read on what those sitting across from you are really thinking. Remember the scene in Annie Hall when Woody Allen’s character is saying one thing to Diane Keaton’s character and thinking another. I am often in meetings where the financiers are saying one thing but their faces show something else. Once the meeting is over and the entrepreneurs are gone, they verbalize what their expressions meant.
If you want to get the best terms from the best sources, you must be able to think like a financier. Consider it an exercise in controlled schizophrenia. Heck, it’s better to walk a few miles on a polished marbled floor than to be tossed out on your butt on one. Why not skip the pain of your hind quarters smacking on cold stone?
Here’s how the most difficult financiers will screen for market size, competition, and marketing and sales strategy. In the following scenarios, I list the questions you’re likely to be asked and translate what the financier is probably thinking. I also include what the financiers will do to follow up on your answers. Better to be prepared than to be blindsided.
Financier Issue No. 1: Tiny Market Size
1. What’s the size of the primary market you’ll sell to? Secondary? Tertiary? State the projected growth rates of each today, tomorrow, and over the next three years.
Translation: That’ll stump them!
2. Why did you select these markets, and why in this order? What makes you think you can penetrate them?
Translation: What makes you so special?
3. You say you’re solving painful problems for your potential customer. What is the prevailing industry business model? What are the projected switching costs for the customer?
Translation: Bring it on, kid.
4. What is the selling cycle? What proof do you have? Do you have a long selling cycle for a premium product and a 50% shorter cycle for a “starter” or lower-end product? How is each relationship established? Sustained?
5. Who are the key purchasing decision influencers? What’s the average selling price? What are their budgets? When do they need to formally cost-justify a purchase? How do they do this?
What happens next: The financier will have an associate or intern research and verify the market sizes that you stated. They’ll also have them scan relevant blogs and collect industry news articles relevant to the available market.
Financier Issue No. 2: Tons of Direct Competition
1. What’s your competitive analysis: today, tomorrow, for the next three years?
Translation: All right, let’s get this over with. Yawn.
2. Which competitor was in the market first? What are they doing wrong? Where are they vulnerable? What’s their business model? How is it broken? How is yours better?
Translation: They better have a quadrant! I want a competitive quadrant!
3. What barriers to entry have you established? Intellectual property? Exclusive strategic alliances? What other types of protection do you have?
4. Rank your competitors by: