This article, adapted from a post originally published by the author in Inc. Magazine, is the second in a three part mini-series on deep dives. To read the next article see: Deep Dive Mini Series: Avoid These 5 Deep Dive Meeting Pitfalls.
As most investors know, the next step after an initial pitch is usually a longer format “deep dive” type of meeting. In Prepping an Entrepreneur for a Deep Dive Meeting with Investors, we talked about what a deep dive meeting is, and, more importantly, how to help prepare an entrepreneur for one. Now let’s look at how a team can navigate its way through a deep dive so it can move forward with investors into the due diligence process.
The main point of these deep dive meetings is for the team to convince investors to move forward. So how do they do that without tripping up? Here are some proven strategies to share with them.
Navigating the Meeting
Although most investors know it, entrepreneurs are surprised to learn the deep dive meeting is as much about them as it is about the company. Many investors feel strongly that the team is more important than anything, including the market. So a major goal of this meeting is to gain confidence in the founder as a person. That takes people skills. The founder will need to walk this very fine line between, on the one hand, presenting him/herself as a knowledgeable and confident entrepreneur who is a leader able to control a room and stay on topic, and on the other hand, being coachable, open to suggestion, a good listener and a facile, comfortable on-the-fly thinker. Finding the right balance is every bit as hard as it sounds.
Clarify What Is Being Asked
Since the format of a deep dive meeting is essentially a Q&A session, an entrepreneur’s body language and how he/she initially reacts to questions is as important as the ultimate answer. It never hurts to try and smile a bit (or at least avoid a grimace of pain) and it is generally a good idea to acknowledge and validate the question with a quick “good question” or “I’m glad you asked that” or “let me see if I understand what you are asking.” It is very important that the entrepreneur understands what is being asked, so he should ask clarifying questions to avoid:
- Looking like a poor listener and poor communicator who doesn’t understand or care what is being asked;
- Appearing evasive or as if trying to avoid a question simply because he is mistakenly answering the wrong question; and,
- Accidentally introducing a bunch of extraneous information while answering the wrong question – he could end up raising a host of issues which were never on anyone’s mind until he opened the can of worms.
In fact, it is a really good habit for an entrepreneur to go beyond the actual words and see if he/she can (diplomatically) figure out or clarify what the “question behind the question” might be. Sometimes investors are worried about an issue, but they ask around it; probing the “symptoms” instead of hitting the issue head-on. Going directly to the source of the anxiety can save a lot of trouble for an entrepreneur.
Building Confidence Through Rapport
It can also be very helpful, and go a long way toward establishing rapport, for an entrepreneur to repeat the question back in his/her own words and try to figure out and clarify what is really on investors' minds. For example, if they ask an entrepreneur about his/her cost of customer acquisition, they may really be trying to get at how the company is going to go to market and what kind of sales approach it is going to use. Ultimately the goal is to drive clarity and build confidence in the team and in the plan. That takes communication and effort.
This kind of back and forth, seeking to understand, paying attention to and respecting the questions has tremendous benefits and builds comfort with the investors. At the end of the day, the entrepreneur is trying to establish a feeling of partnership. He/she is not trying to convince people that he/she is the smartest person in the room, that he/she knows everything or that he/she has all the answers. Entrepreneurs are trying to convince investors that they are smart and have thought a lot about the problem. That they have some good ideas, and some good reasons for holding those ideas. But the entrepreneurs are not required to have it all figured out. It is OK for them to admit that they are learning and adapting as they go, as long as the investors believe the entrepreneurs are determined to get there in the end.
How should you coach an entrpreneur to react to a question to which they don’t know the answer? This issue is a perfect microcosm of the above dynamic. An entrepreneur’s first instinct will probably be to panic, or maybe even to make an answer up. Those are the worst possible reactions because they’ve let the question sink them.
Instead, they should try to use the question as a showcase for how they work and an opportunity to build rapport. A perfect response to such a question should be some variation on: “That’s a good question. In truth, I am not sure. But here is how I think about it: my sense is that it would probably be xyz, because of this reason or that reason. And we’ve got a little data to back that hunch up. But we don’t really know for sure, and there is more work we have to do on that. What do you think about it? How would you go about figuring it out?”
Remember, investors are people and people instinctively respect that kind of candor and will trust entrepreneurs all the more for it. And at the end of the day, it is their trust and respect the team is after. Investors know the road ahead is going to be hard and uncertain, so they need a reason to bet on a team to get them down it. Some good prep and a plan for navigating the deep dive meeting can make a huge difference. Next up in this series we’ll cover some traps entrepreneurs will want to avoid during the meeting so they don’t undermine themselves.