How Investors Think - Enjoy the Work

How Investors Think.

Fundraising is not easy. However, two simple rules can improve your chances: know your audience, and be truthful.

Consider this, investors only get fired for the deals they actually do.

Pick any early-stage investor out of a crowd, and they’ll have a story about the one that got away. They almost invested in Google, just missed on AirBnB, sadly rejected Uber, or were one of the 300 investors who passed on Pandora.

Not one of them lost their jobs. Why? Because investors are only held accountable for the deals they actually do.

Just like startups, venture capitalists have to raise money too. They raise those funds from Limited Partners (LPs). LPs come in all shapes and sizes, such as foundations, endowments, pension funds, insurance companies, and family offices. The VCs pitch those LPs on a differentiated approach to startup investing and promise above-market returns. The LPs then commit capital to the VC and periodically receive reports on the fund’s performance.

Do you know what’s in those reports? A list of investments made.

You know what’s not? A list of investments NOT made.

Why is that important?

As a founder, it is useful to understand the lens through which an investor views a startup. While the investor will consciously wrestle with whether you are working on a big opportunity, have a differentiated solution, and boast relevant domain experience, subconsciously, the investor has a separate question in their mind: “Will this startup get me fired?”

Since they only get fired for the deals they actually make, investors have to be incredibly risk averse. They need to eliminate surprises and deeply understand the risks of your business. They do this by asking a predictable set of questions to try to craft a narrative of what the future might hold. They call it “building conviction.” It’s not easy. Why? Two simple reasons:

As an entrepreneur seeking capital, you’re motivated to present your company in its best light. If that means slightly optimistic storytelling and cherry-picking data, so be it. That means the VC has to try twice as hard to uncover the holes in the story and the inconsistencies in the data.
For most early-stage investing, there simply is not that much information. There might be a handful of customers, a small group of employees, and a limited financial history. With such little information, forecasting is, at best, an imprecise exercise

So, we have investors who are at personal risk when they deploy capital, who expect entrepreneurs to misrepresent the truth, and yet who must reach long-term conclusions anyway (often with very little time).

Knowing that typical venture investors face this dilemma, how can the entrepreneur improve her/his chances of landing capital? That’s easy. Start with the truth.

Let’s assume some of your data is great, and some aren’t. Show both.
You don’t have answers to every critical question. Admit it. Don’t make something up.
And last, if asked a direct question, answer it directly.

If an investor does invest in your startup, it will represent the beginning of a long journey together.

Yes, the dance between investor and founder is a negotiation. Gamesmanship by both sides is likely. But it’s also the start of a relationship; the best of those are built on a foundation of trust. When they first start to evaluate your startup, the investor is looking for reasons to run for safer ground. Be prepared so you don’t give them any.

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Learn more about Jonathan Lowenhar at ETWadvisors.com.

How Investors Think.

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