Sunday, July 19, 2015

The Only 4 Reasons Investors Say "Yes"

Alex Schiff is a great guy and the creator of one of my favorite products, Fetchnotes.  I met him when he was raising money for Fetchnotes (in the end, I decided not to invest because while I loved the simplicity of the product, I concluded that there weren't enough self-organizing people like me to represent a big enough market...sadly, I was right, and I've seldom been sorrier to be proven correct).

Alex recently wrote a terrific "lessons learned" post about his experience with Fetchnotes, which demonstrates that he is also a talented writer (before he dropped out of school, he was a journalism major).  The whole post is well worth reading, especially for first-time entrepreneurs, but I want to highlight one paragraph in particular which I think does a great job of summarizing why investors say yes:
"There are only four ways an investor says yes: 1) you have massive traction, 2) you have social proof from other trusted investors/accelerators/mentors, 3) they have a personal passion for the problem/industry/product, 4) they have a personal relationship with the founder. If one of those doesn’t apply, you might get someone to take a really deep dive, but in the end there will be some stupid, idiosyncratic reason they say no at the last minute."
I frequently talk with entrepreneurs who are smart, talented, and capable, but who are trying to raise money too early.  Alex's list is a great checklist for anyone thinking about raising money.

1) Do you have massive traction?

As I've written before, nothing matters more than traction.  I often joke that if we made contact with an alien civilization that practiced baby cannibalism, and one of its members started the next Uber, investors would find a way to rationalize investing.  "Who am I to judge another person's culture?  After all, we're talking about alien babies, not human babies.  And C'hixelgleep is really killing it when it comes to making the numbers!"

It's only if you don't have traction that you have to fall back on the others.

2) Do you have the imprimatur of trusted investors/accelerators/mentors?

As much as I decry the groupthink of investors, brand-name accelerators are a powerful sign of quality.  I've had one company get offered a spot in YC, and turn it down after failing to negotiate down the equity component of the standard YC deal.  I urged the founder not to screw around, and told him that *I* were to start a company, I'd apply to YC even though I already have a vast network of friends and contacts throughout the Valley.

One interesting point is that trusted mentors can also be your gateway to receiving investment.  One of the reasons that entrepreneurs still reach out to me (other than desperation, of course!) is that I have a pretty good hit rate when I introduce a company to investors.  The fallacy lies in believing that I or other mentors have any real power to push a particular company, independent of its merits.

First, I only endorse or recommend companies that I believe in.  My reputation is not for sale or rent.

Second, the only reason that investors continue to take my introductions is the fact that they know that the prior point is true.  The instant I tried to game the system, I'd lose my credibility.

Third, investors always make their own decisions anyways.  All I can do is provide access; you have the close the deal on your own merits.

3) Does the investor have a personal passion for the product/industry/market?

Personal passion is helpful, but unlike traction, it's not definitive.  Remember, I loved Fetchnotes (and still use it every day).  That didn't convince me to invest in the company.  Most investors can distinguish between product quality and business prospects.  A great product is necessary, but not sufficient.

4) Do you have a personal relationship with the investor?

The obvious thing here is to raise money from friends and family.  But unless you're fortunate enough to come from a long line of Drapers, or went to Stanford with Peter Thiel, this won't help you much when it comes to raising an institutional round.

(Side note: There's a reason why friends and family are usually the first money in.  That investment is an irrational bet on you.  And if you're unwilling to take their money, that's also a strong indicator of how much you believe (or don't believe) in what you're doing.)

It's almost impossible to build a personal relationship while courting an investor (though it is possible; one intrepid entrepreneur got my money by showing up at every event that I spoke at, just to give me updates on his business--fortunately for him, his business was going well).  Instead, build relationships before you need to raise money; it's a lot easier to get a meeting with a VC who is a personal friend than it is via sending cold emails.

Bear in mind, however, that when an investor is considering an investment, they are wearing their "investor" hat, not their "friend" hat.  I invested in one entrepreneur who was shocked when he was unable to raise a Series A round for his startup.  He couldn't believe it, because he had a wealth of personal friendships with VCs, and they happily signed up to speak or sponsor previous events and gatherings he had organized.  The facts of life are that, in the words of Cyndi Lauper, money changes everything.

As I wrote earlier, I encourage you to check out Alex's entire piece, which should be required reading for any first-time entrepreneur!

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