Courting investors is a lot like dating. There are the coffee dates, the small talk, maybe even a little batting of eyelashes and making sure all of your good traits are front and center. But after the initial introductory stage, what makes an investor commit to the relationship?
Most venture investors want to invest early in a company that has huge growth potential. They are looking for a substantial reward to offset the risk of investing in an illiquid privately held company that has little to no revenue. Like a marriage, before putting a ring on it, investors need to know and trust where they’re placing their investment. They spend a significant amount of time analyzing the people, the product, and the performance of a company.
Most experienced investors care significantly about the founders they are investing in, and want to know what kind of people they are. Throughout the courtship phase, they are trying to drill down on 3 strong indicators of future success:
- What is the character of the founders running the business? Do they have integrity? Are they trustworthy?
- When problems arise and things get tough, how do the founders react? What does their past history reveal? This is important so that investors can feel confident that they won’t be on the short end of the stick when the inevitable challenges arise.
- What is the dynamic among the founders, and between the founders and the company leadership? Is the team cohesive? Do they value one another? How well does the team work together? Does the team respect the company leadership, and are they willing to follow them?
Answers to these questions are crucial to building an investor’s confidence in taking the leap.
Experienced investors constantly track and measure their own enthusiasm towards the founders and their product. They gauge whether their enthusiasm increases with each interaction. If not, they are unlikely to invest. Founders need to show investors they have a solid product or service that is unique in some way from what is already out there, and they must demonstrate that people want it.
In the words of Mark Achler, a mentor at Techstars, “to paraphrase Field of Dreams, most entrepreneurs believe that if we build it they will come. But a great product without customers is a great product – not a business.” Founders must clearly demonstrate that customer demand exists at each new meeting. The combination of the building excitement, backed up by facts, will entice investors to invest because they want to be part of a winning team.
Experienced investors also want to be confident that founders can raise all of the capital that the company needs to hit their targets; otherwise early investors will be left holding an empty bag. They want to see a clear track record with a history of successful performance by both the founders and the leadership team. This helps drive the capital raise. More importantly, it indicates a greater chance of future success.
It also helps if the founders have had a prior successful exit. However, a flawless record isn’t necessarily a prerequisite. In fact, having faced very challenging situations is probably better, as it gives the founders an opportunity to show how those situations were managed and how they rose again afterward. When talking to investors about their past experience, founders should be transparent. They should talk about their mistakes, and how they have learned from them. Investors are interested in how a founder’s experience has made them better equipped for their current venture.
After analyzing the people, the product and the performance of a company, investors will decide whether or not to move forward. Founders who give thoughtful attention to addressing what investors need to know will increase their chances of getting that ring.
Written by: Judson Sutherland, Founder & CEO