In order for a founder to be successful in raising money, they have to find the right investor at just the right moment. That right investor has to invest in the type of ideas that the founder is presenting, has to find that opportunity compelling, and has to have money available to invest.
Unfortunately, many new founders treat investors as this homogenous group of “people with money.” Nothing could be further from the truth. They are as unique as you are.
How are they similar?
While investors are not made in factories from the same raw materials, though a lot of them do have degrees from the standard list of top schools, they do share some similarities.
They are all looking for the next big thing.
In order for them to do their job—return 3-5x the portfolio value—they need at least one extraordinary home run. They need an investment that they’re going to put $1M into and get $10-100M back. They need this home run because they’re going to make a bunch of investments that fail. It’s the nature of the game. It’s why you hear the more flamboyant investors say things like “I’m a unicorn hunter!” When you raise money from venture, you’re joining this game. As long as you accelerate, you’re going to get attention. When things slow down, you’re going to get abandoned.
They have a thesis
All investors have some idea of the type of company they invest in. Some invest broadly. Their thesis is that they invest in “great founders anywhere”. Others will be very narrow, “late-stage, healthcare” types of focus. Why do they have a thesis? For several reasons. First, they may have domain expertise that makes it easier for them to assess the merits of an investment. Second, they may have told their Limited Partners that they only invest in “X”. So “X” is their thesis. Look at their websites. Look at prior investments. Do you fit their thesis?
They invest in a pattern.
The agreement that venture funds have with their limited partners generally specify a 10 year target for a return of capital. That means the venture investors have 10 years to find companies like yours, place money in those companies, and then, no more than ten years later, sell those holdings for an extraordinary return. In order to do so, they make a bunch of investments in the first 2-3 years of the fund, place additional money into the ones that are doing well, and hope for an acquisition or IPO before the 10 years is out. You’re looking for firms that have just raised a fund and are in the 2-3 year window of placing investments. If a fund hasn’t raised money in a while, they should be on your priority list.
They are generally not operators.
They will all have an opinion on how you should run your business and the vast majority have never run a business like yours. Most have only run a venture fund? Could you run a venture fund? No. Could they do what you do? No. The benefit that investors do have is that they’ve seen a bunch of companies similar to yours. So they do get a sense of the general arc of building high-growth companies. They always have advice. Take what they say with a grain of salt.
It’s business, not personal
Don’t take rejection personally. Don’t take success to mean you’ve found a life partner. They have money. You want it. Make your case. Accept their decision. Move on. Either move on and cash their check or move on and find another investor. They’re not judging you, they’re judging your business opportunity at this moment in time.
Note that even within these categories of sameness, there are variations. But understanding what investors are after helps you focus on investors who are interested in your play.
What makes them unique?
Getting a sense of the unique characteristics of the person you’re dealing and the firm they represent will help you set your own expectations and give you a sense if this investor is going to be the type of partner you want on your journey.
Not all capital is the same.
I was once told to raise the dumbest money you could. “Find investors who do little due diligence and stay out of your business” was the advice. If you’re only interested in money, this advice is solid. Get the money. Get back to work. However, there are some former operators in the venture business who might be helpful to you beyond money. If they’ve founded and sold a company in your domain before they became an investor, maybe they could be helpful to you with product management, marketing, and sales advice and assistance. The latter is rare but if you find one that you can work with, they could be helpful. The worst is the “dumb money” that wants to operate your company. Know what you’re getting into.
Some are fast. Some are slow.
Lately, they’ve been slow, but there are investors who will be quick to write a check. Who are these investors? There are venture firms, like Accel, that place lots of small bets early. They generally write small checks and make follow up investments in the winners. In order to play the seed game at scale they can’t spend too much time looking at every investment. Others, will place careful bets looking at every aspect of the company and waiting for others to come into the round before they commit. Know which type you’re dealing with so that you can match their pace. Know which you’re dealing with so you don’t run out of money while they’re thinking.
Their Why
Why do they do what they do? In business school, my peers went into investment banking not because they wanted to help capital find its greatest return. They went into the business to make a lot of money. I suspect your average investor fits this archetype. But there are many variations. Some are mission driven. Do they invest in cancer research because of a personal experience? Are they focused on less represented founders? Do they want to save the planet? Do they want to go to Mars? Getting some sense of their “why” helps you find the right investor for you and increases the odds that your pitch will be on target.
Their timeline
A general rule of thumb is that venture investors are they’re looking for your exit in 5–10 years so they can pay off the fund. Angel investors seek a 3-5 year return on capital, usually because they’re consolidated out of the cap table. But there are no hard and fast rules. Sometimes you’re a fund’s last investment and they’re looking for a quick flip. Know the investor’s expectations so there are fewer tears later.
They all have lives outside of this game
You also have to remember that they’re dealing with the same crap you’re dealing with in your daily life. They may be having a good day. They may be dealing with the latest crisis that would put anyone in a foul mood. Remember that they’re just as human as you are. You have one snapshot in time. Try not to judge.
When you’re dealing with investors, you’re making a sale. The sale is not your product. You are selling your idea and yourself. Understanding the buyer in this transaction will give you better insight into how to close the deal.