Navigating Promotion and Prevention Questions
Navigating Promotion and Prevention Questions
The current macroeconomic environment means that investors are more risk averse, leading to more prevention questions being asked. Learn how to flip the script and take advantage of this.
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Storytelling is the most important aspect of fundraising, but what happens when you can't accurately tell your story?
I'm a pretty skeptical person. If you read any of my articles, I think you can see that quite clearly. However, as a VC, being a skeptic doesn't always pay. The game of venture involves looking for outliers. You need to be skeptical enough to miss the bad investments, but open-minded enough to collect the winners. It's a tough balance to manage and maintain, especially when conducting due diligence on founders.
A topic I've been considering over the last few months is the difference between a 'promotion' question and a 'prevention' question. I was taught this concept by my Fiancé, Ananya, who coincidently also works as a VC, focused on investing in women founders - you can check out her cool fund here.
To define the two terms:
A promotion question has a level of positive bias attached to it. They are asked in a way that allows people to talk positively about their grand vision, their growth prospects and the progress they have made.
A prevention question is layered with negativity. These types of questions are usually skeptical of any numbers, have a negative view on defensibility and competition, and perhaps even the aptitude of the founders.
Doubling down on that last point, research performed by Dana Kanze, an Assistant Professor of Organisational Behaviour at London Business School elucidates the implicit bias against women founders by both men and women VCs. Her research showed that women founders were more likely to be asked prevention questions. As a result, Kanze concludes that women are not being allowed to fully showcase the positive elements of their business, leading to inferior funding outcomes.
Unfortunately, I think this problem actually runs deeper within the ecosystem. Part of a VC’s job is to run a sales funnel on all the startups that approach us for funding. We all have a finite amount of time and need to be able to qualify or disqualify startups quickly and efficiently. In doing so, you start to apply quick heuristics to qualify startups quickly and push them down the funnel.
By relying on heuristics as a crutch to do your job, things will inevitably be missed. For example, if a pitch deck looks bad, a VC might flick through it in a couple of minutes and not really care to read or understand the startup well enough to accurately qualify it. Unfortunately, there's really no measure to keep people accountable to qualify opportunities accurately. Picking and investing in startups is a subjective exercise1.
As a result, prevention questions are running rampant across the industry. I see it when our portfolio companies are out fundraising and when looking to get other investors to fill rounds that we're leading. Given the current macroeconomic climate, investors are way more fearful and are looking to minimise the risk that they're taking on.
I don't necessarily blame them for doing so and I'm probably guilty of doing it myself. You see the amount of pressure founders are under either in or outside your portfolio, and so it's logical and rational to minimise the risk you take on during stressed periods. VCs pattern match, or rely on their past experiences to inform their future investments, which is a fairly logical thing to do, however has some downsides associated with it.
VCs are bombarded with information from every angle, and so when looking at new opportunities, their line of questioning will largely be dependent on their specific contexts. For example, they might've invested in a few [insert category here] businesses before. From a founder's perspective, this might appear positive. However, if those businesses haven't performed well, it significantly reduces the likelihood of the VC funding a startup in that sector, even if there's potential for success.
Whilst I can't necessarily change the behaviour of the industry, I can bring implicit biases and norms to light and bridge the gap between investors and founders.
For investors, the advice is straightforward. It's important to ask a balance of both types of questions in your meetings with founders. Provide founders with the opportunity to talk positively about what they've accomplished and what they hope to accomplish in the future, as well as interrogate them if something seems not quite right. You'll need to be honest with yourself, and recognise if you're slipping into prevention mode too often - I know I've certainly done this in the past.
Unfortunately, whilst the onus should be on investors to internalise and implement the above, I think the burden will fall on founders to deal with it. As a result, on the founder's side, the advice is more nuanced and will take more practice to implement.
Understand the investor’s biases early
The way you tell your story should change based on who you're speaking to. Different investors will want to see different things. Some investors like the hear the big idea upfront and then your pathway to getting there. Others like to be led on a journey to the big idea. Figure out what type of investor you have on your hands quickly and pitch accordingly.
You can do this by asking questions about why they invested in related portfolio companies, or what they like to see in the businesses that they invest in. Another handy way of gathering info on an investor's style is by chatting to founders who have pitched that investor before.
Be your own skeptic
I feel like this is pretty obvious advice, yet it isn't necessarily apparent to me that people do it, so here goes. I think it's important to figure out where an investor might dig. This is semi-related to the first point, but understanding what certain investors anchor to is important because you can try to pre-empt questions that they may have with either qualitative or quantitative data. Moreover, I think this encourages you to think about your business from various angles and might make you consider things with a different mindset.
Answer the question you want to answer
If you're getting asked a lot of prevention questions, you need to think about the motivation behind the question and answer it in a way you would a promotion question. This takes a lot of tact and nuance, but the best founders can turn questions around to suit them and their stories.
However, as a cautionary warning, VCs will get annoyed quickly if you don't answer the question they've asked. So to begin with, I think it's important to answer the question directly, and then expand on your answer to include some promotional elements. This way you're providing a balanced answer. Over time and with practice, answering questions more seamlessly will become second nature.
For example, if you get a question about your market size being too small, the default answer from a founder is usually something about the assumptions being quite conservative etc and that there is potential for the market size to grow over time. However, as investors, we know that market sizing is a guestimation exercise. They’re always wrong, and markets will surprise you either by growing faster than you expect (a good thing), or slower than you expect (a bad thing).
Instead, of just trying to justify the market sizing you’ve done, take a step back and think about what the investor is trying to ask you. There’s clearly a concern about whether the market is big enough to justify a venture-scale return.
As a result, to reframe this with a promotion response, you need to talk through the following:
Why the market might look small, but will increase in size rapidly over the next 3 years. Point to data that showcases this movement is already happening. VCs like to invest at inflection points, versus before any market movement has taken place.
Why your product can capitalise on that opportunity now, and how your sales pipeline/customer acquisition strategy is well-suited to scale quickly
How your product will contribute to accelerating the growth of the market, and how you will emerge as the king
I don’t think the above answer is necessarily that revolutionary, the missing piece for founders is usually backing up their claims with data or trends that show they might be on to something.
In a people-driven industry, it's important to acknowledge that intersectionality is at the heart of everything. It drives how we ask and answer questions, how we think about building and supporting business, and how we problem-solve our way through tough situations.
One of the goals of my writing is to bring to light some of the hidden and more nuanced dynamics that exist in venture capital and startups. Whilst I've not had to raise capital before, I have worked in a startup, founded my own small businesses and supported numerous startups in our portfolio. Being a VC-backed founder is arguably one of the toughest things you can do. I want to give founders the tools to succeed against the barriers put up in front of them.
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Abhi
As a quick aside, I think it's incredibly hard to turn startup investing into a completely objective activity, especially at the pre-seed and seed stage where there isn't much quantitative information to use. I think to solve this issue, there probably needs to be a diverse range of funds that are constructed to serve different types of businesses or industries. It's a tough balance to get the risk/return balance right, and it's even harder to convince limited partners to take a gamble on a novel fund structure.