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How Entrepreneurs Should Answer the Most Challenging Venture Capitalist Question

Posted by Early Growth

June 11, 2013    |     4-minute read (698 words)

Originally published in Forbes.

Venture capitalists (VCs) make you work hard for their money by inundating you with question after question about your fundraising process, your company goals, your founding team, among other things. Many of these questions will seem reasonable. Some will seem ridiculous.

But no matter the question, you must have an answer. And your answers better be good.

Behind all of this interrogation, there is one key underlying question: what makes you different? Regardless of the variation on the theme, your potential VC is really asking why your business—as compared to others vying for their money—is worth their investment.

If you’re ready to join the ranks of funded entrepreneurs, you need to be prepared to answer this key question. How?

1. Begin with a thorough competitive analysis.

You need to be able to paint the big picture in broad strokes, providing a comprehensive overview of the competitive market, including potential risks, success factors, and barriers to entry.

2. Build your value proposition.

What is your unique value proposition—and how can you prove it? Identify your customers (or potential customers) and their needs. What pain point are you addressing and what’s your proposed solution?

Once you’ve done your competitive analysis and built your value proposition, you’re ready to make the case for what makes you different, weaving your unique selling points throughout your entire pitch. Make sure to consider the following when crafting your response:

  • Offering.

    Specifically, what product or service are you providing that nobody else does? Even if there are many competitors with a similar offering, how can you distinguish yours? Is it a difference of perspective? Cost? Ease of use? Target the little (or big) things that prove the uniqueness of your offering. There needs to be a hook somewhere; find it and use it.
  • Approach.

    What makes your business model or marketing strategy stand out? Detail your market penetration potential, including potential sales and distribution channels. You want to show that you have a plan for making money, a plan that is adapted for your particular company—a plan that will work (even where others may have failed).
  • Technology.

    If it’s your state-of-the-art technology that makes you different, push this point. Be prepared to show off the technology that is the engine powering your business. Note that if it’s your technology that makes you stand out, you also need to be prepared to discuss future tech developments to show your competitive advantage won’t be lost somewhere down the road, post investment.
  • Team.

    Sometimes it’s the people at a startup that make it stand. If this is your company strength, sell it. Who are your key players? What were their previous successes? As any successful serial entrepreneur can tell you, an all-star team (or even a team with one lone shining star) can be a powerfully effective selling point.
It really all boils down to what makes you special. VCs meet so many entrepreneurs; they are the audience for an endless litany of pitches. Unfortunately, this means VCs are often bored and somewhat jaded. They are looking for a spark, for the magic. And they won’t dig to find it. That’s not their job.

It’s your responsibility to bring to the forefront what makes you stand out. Ultimately, you want to thoroughly convince the VC, that, if they take the leap of faith to invest in you, you are going to execute on your vision in a way that you—and only you—are in the unique position to execute on.

What makes you stand out to VCs? Tell us about it in comments below.

Courtesy of YEC

David Ehrenberg is the founder and CEO of Early Growth Financial Services, a financial services firm providing a complete suite of financial services to companies at every stage of the development process. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.

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