By Martin Zwilling

Don’t bash the competition. Every investor knows how vulnerable a new startup is to competitors, so investors always ask about your sustainable competitive advantage in the marketplace. How an entrepreneur answers this question speaks volumes about their knowledge of business realities, customers, confidence, and their ability to handle investor funding.

There is no perfect answer to the competitive advantage question, but investors are looking for how your offering will keep ahead of competition, not just at this moment, but throughout the life of their three to five-year investment. They are also seeking to find out how you handle one of the many tough questions that a new founder will get in today’s market.

A strong answer should be something like “Our product introduces a new lower-cost technology, which we have patented and trademarked, that makes us very attractive today, and will provide a wealth of additional products as we move forward.” That says you are competitive today, have a real barrier to entry, and the potential to remain ahead of the competition for a long time.

Based on my own experience as an angel investor, and feedback I get from many other investors, here are a collection of answers that we often hear instead, from the least credible to at least reasonable:

Insist you have no competitors. Leading with this answer will likely terminate any further investment opportunity with this investor. He or she will assume your comment means there is no market for your product or service, or you haven’t looked. Neither speaks well for you or your startup. Even if you hedge by saying no direct competitors, we all know that existing cars are still big competition to your new flying automobile.

Claim the first mover advantage. This is one of the most frequent responses I hear, and is rarely convincing. The problem is that startups have limited resources to keep them ahead of big companies. If your early traction highlights an opportunity they have missed, they can mobilize their huge resources and run over you. First mover advantages are only sustainable by large companies, or founders with deep pockets.

Proclaim your solution as a paradigm shift. If you insist that your technology is so new and unique that it will disrupt your competitors and the whole market, investors will fear that neither they nor you can afford the time and marketing required to weather the change. They will likely decline on the basis that historically, pioneers get all the arrows.

Highlight your world-class team as the secret sauce. Insisting that your team is better than any other, giving you a sustainable competitive advantage for the long term, will likely come across as naiveté or arrogance. Investors know that no startup has a lock on the best people and processes, and investors don’t deal with unrealistic founders.

Declare that you will offer the product or service free. Free is a dirty word to investors, since they need a return on their investment. Perhaps you intend to collect money from advertisers, but this requires a large investment to get the audience you need before monetization can work. Facebook spent over $150 million before revenue.

Intellectual property as barrier to entry. I like patents, trademarks, and trade secrets, so this answer is a better sustainable competitive advantage than the other five answers. Now all you have to do is defend your position, and we all know that patents can break a startup in court battles, and will have alternative implementations if the price is right.

Thus, there is no perfect answer to this question, so the best entrepreneurs see it as an opportunity to highlight their own advantages, rather than put down a competitor. Being negative is never the answer. For example, it’s tempting to say that your worst competitor has poor quality products, requiring costly maintenance, but it’s much better to say that you provide a five-year free warranty that no competitor can match.

After highlighting your best competitive features and your intellectual property barriers to entry, I encourage you to put on your humble face, and proclaim your determination to never stop improving your products and processes to out-distance competitors. You want investors to believe that you are a realist, but have the confidence and determination to win.

Investors know that winning in today’s highly competitive environment is more a mindset than a product feature. Competitor bashing is not a skill that you need to hone. I look for entrepreneurs that can sell themselves and their offering to discerning customers. Money from customers and investors is the same color.

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By Martin Zwilling

Every entrepreneur has blind spots which limit their effectiveness and success, but due to ego, over-confidence, or deferential subordinates, many live totally in the dark. Some are smart and humble enough to assume that they don’t know what they don’t know, but lack an effective process for shining a light on their blind spots. Both are equally surprised by their every setback.

I recently found some real insight on this subject in a classic book by Robert Bruce Shaw, aptly named “Leadership Blindspots.” Shaw specializes in organizational performance and has helped a wealth of business leaders identify and overcome their weaknesses. He provides a detailed analysis of the blind spots of many well-known business powerhouses.

Shaw argues that every successful leader balances two conflicting needs. The first is to act with a confidence in their abilities and faith in their vision for their organization: The second is to be aware of their own limitations and avoid the hazards that come with overconfidence and excessive optimism. That means that they have to see themselves and situations accurately.

I agree with him that the best way to do this is to continually ask the right questions, in the right way, to avoid and identify blind spots. Here are some key guidelines that we both offer to entrepreneurs to drive this process:

Avoid yes-or-no questions. Closed-end questions (yes-no) are efficient, but don’t surface data that may be critical to a leader’s understanding. Questions are called open-ended when they allow for a variety of responses and provoke a richer discussion. These allow a leader to know what he doesn’t know, and ultimately make a better decision.

Don’t lead the witness. Hard-charging leaders often push to confirm their own assumptions about what is occurring in a given situation and what is needed moving forward. This can result in questions that are really disguised statements, like “doesn’t this mean that we really don’t have a quality problem?” These usually prevent contrary points of view and further data from surfacing.

Beware of evasive answers. All too often, people will avoid giving direct answers to direct questions. They may not know the answers or not want to provide the answers, to appear smart, or not want to offer incriminating data. Leaders need to keep coming back with directed questions until they get a straightforward answer or “We don’t know.”

Ask for supporting data or examples. Leaders need to ask questions that surface points of view and, at the appropriate time, also clarify which answers are based on fact and which are based on speculation. They should encourage people to say what they know from data and what they think they know, and make sure they clarify the difference.

Paraphrase to surface next-level details. One technique to push people to provide more information is to paraphrase what you are hearing. While this may result in a yes or no response, proceeding to next-level questions opens up the dialogue. Smart leaders sometimes mis-paraphrase what they are hearing in order to provoke a richer dialogue.

Ask for alternatives. Another approach to surfacing non-confirming data is to overtly ask for an opposing point of view. A related line of questioning is to ask the respondent to alter his or her fundamental position, like “You are asking for $10 million to grow this brand. What more could you do if we gave you $25 million?”

Give an opening for additional input. Leaders also need to provide an opportunity for others to offer additional input and, in particular, dissenting views. Often, the final moments of discussions are the richest, as people will wait until that time to surface what is really important to them. Ask if there is anything left unsaid that should be heard.

In today’s global business world, you should assume that all your peers are smart and experienced, but have blind spots just like you. These are automatic behaviors that are not flaws, but they do need to be identified and mitigated by continually asking the right questions as outlined here.

Otherwise they will undermine your organizational performance and may well destroy your legacy when you least expect it. Early learning is a lot easier than a later recovery.

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