Many of the early-stage founders I meet like to tell stories that are uniformly optimistic. No aspect of the journey they describe, and nothing I ask about either, concerns them. Their market is big, their product is just what customers need and it’s all driven by AI. Their sales next quarter are expected to take off and grow tremendously. Just last week they actually had this incredible partnership meeting and a very large/well-known enterprise is all set to become a customer. Of course the partnership will open all kinds of doors, so the future is truly bright.
To found a company you need to be fundamentally optimistic. You are creating something that did not exist before and you have to believe you can do it. The mistake is to confuse optimism with having a clear line of sight to victory in every aspect of the venture. This post is about that mistake and why you should avoid it.
I’m pretty sure many founders really believe for themselves that they have or need to have that clear line of sight and they’re just telling me what they authentically believe. There are other founders who might be telling me, as an investor, what they think I want to hear.
This post is for those latter founders: please don’t tell me what you think I want to hear, especially if you think I want to hear that your success is a sure thing. Tell me about the hard things you haven’t figured out yet. Here are my reasons:
The hard things exist, whether you talk about them or not
If you are raising venture capital for a business at an early stage then your business has many difficult moments ahead. Your product may be an ambitious solution to a difficult problem and it’s not going to work just as you envision. Maybe it involves some machine learning models trained on initial data you collected and that data will turn out to have a sampling bias that renders your models unhelpful for the customers you’re targeting. You almost certainly only have a rough idea of what your customer acquisition cost actually is, and anyway it’s too high and will need to come down at some point. You may have a strong core team but to grow the way you plan in the next six months you need to quickly hire several more sales employees, and that won’t be easy for a variety of reasons.
The hard things for your business undoubtedly exist. Almost every investor you speak with will know that. So when you spend 45 minutes with them and don’t mention a single hard thing, they’re going to have to make a judgement: Either you haven’t recognized or identified the hard things in front of you, or you’re not being direct and honest about those challenges. Neither assessment helps an investor become excited about working with you. If the investor has been around for a while they are probably even familiar with some of the hardest problems in your space.
The investor already knows the problems are hard; now they know that either you don’t know that, or that you aren’t comfortable talking about it.
Surprises are worse than obstacles and difficulties
Sometimes, very rarely, you may find yourself speaking with an investor when there’s nothing terribly hard happening at that moment or on the immediate horizon. You know you’re going to have to grow the team and finding good people may turn out to be more difficult than you thought, but that’s 3 or 4 months away, so you don’t talk about it.
That’s a mistake because an investor is making an estimation not just of what you’ve done so far and how you’re doing this week or month, but more importantly they’re investing based on how you’ll perform in different scenarios in the future. Investors want to know that an entrepreneur isn’t going to be surprised when they hit a challenge. If you see a problem on the horizon you can prepare for it; if you don’t then you’ll get blindsided.
Hard things are the most efficient way to separate yourself from the crowd
Time is a fundamental constraint for venture capital investors. They’re usually not going to make a decision after spending an hour with you at a coffee shop or hotel lobby. Instead, the decision they’re going to make is whether to spend another hour with you the following week. That time is going to be expensive. It means they won’t be able to spend it with another startup. It may even mean that they’re going to have to fly back to your city sooner than they’d planned, or spend two hours in traffic crossing to your side of Bangalore.
Discussing the most difficult aspects of your business keeps the meeting efficient. Easy stuff shouldn’t dominate the conversation. You already have it handled, so why waste time with what is basically boasting? The hard things are going to be the things on your mind too, so talking about the stuff you’ve already figured out wastes your time too. Openness, humility, and frankness are underrated and rare, demonstrate those qualities and you’ll distinguish yourself as an entrepreneur an investor will be excited to work with.
Your ability to identify and focus on the hardest challenge you face (one that is also critical to your business!) is a primary proof of your ability as an entrepreneur. It’s what separates you from the wantrapreneur who blithely gallops toward a success mirage on the back of an imaginary unicorn. It’s also what separates you from the well-meaning, determined entrepreneur who works very hard but just wasn’t able to foresee the critical challenges to the business. Knowing which things are going to be hard lets you prepare for them, and good preparation is half the battle.
The hard things help align priorities and helps the investor maximize their value to your business
Once an investor gets on to your cap table she is going to have a say about the company’s priorities. Even if she’s a marvelously hands-off board member, she’ll still have advice to share (and that’s her responsibility to her own LPs). You need the investor to be aligned with you on the company’s priorities and usually those will prominently feature the important challenges. Getting on the same page as early as possible, or at least experiencing what a conversation about priorities will be like, is a smart move. Nothing kicks off that conversation faster than talking about hard things.
When you’re open about the challenges that carry the most risk you’re also helping the investor add value as efficiently as possible. They may be able to connect you with other experienced entrepreneurs or technical or regulatory advisors who can help you. They’ll do broader research for you. There are many ways a good investor can help beyond providing funding, and they will want to add that value; they just need you to orient them towards the areas where you are most in need of support and advice.
Hard things are not the same as impossible or implausible things
Sometimes when I ask entrepreneurs to tell me more about the things that will be hard for their business their response shifts to speculation. They tell me about stuff that would clearly be great but which they’re unlikely to ever seriously try to accomplish. The hard things I want to hear about are not things your business does not do or things it will avoid.
The other way I see entrepreneurs confuse my question is telling me about things that were really hard at some earlier point. They were hard until you overcame them and now they’re not really a problem. Those can be interesting and informative stories, but they’re not what I mean by hard things because they’re not really hard anymore. For new businesses the hard things are often difficult to talk about. They’re not hard the way practicing for a marathon is hard: you have to run a certain distance and it’s exhausting, but you know exactly what you have to do and the hard part has to do with mental and physical stamina. For your business, difficulty often has to do with a lack of clarity and lack of understanding. If a market is volatile or demand is hard to predict, then dealing with that unpredictability is a hard thing I want to hear about.
Some investors won’t want to hear about hard things; they may not be investors you want on your board
Founder aversion to frankness about difficulty is not always the founder’s fault. Sometimes it’s a learned trait and indicates the scars of many former investor conversations. When I was raising capital as a co-founder of PaySense many of the investors I met really seemed to only want to hear that everything was easy and under complete control. Their eyes glazed over when my co-founders and I told them about our most serious challenges. Or when they did hear it, they seemed to immediately accept it as a reason not to engage further. It was as if coming into the room they hadn’t understood a technical difficulty existed. And then once I told them about it, it became an insurmountable problem. If I hadn’t told them, then they never would have known and it wouldn’t have been an issue.
That kind of investor conversation always left a bad taste in my mouth. I can see how some entrepreneurs would stop being open after several investor meetings like that. My message for you: don’t let that happen. Stay open and direct. You don’t have to have everything figured out to raise money. And anyway, the really hard stuff is often the most motivating thing about your business. In my experience it’s also one of the best ways to motivate a like-minded investor to back you.