The Real Reason an Investor is Not Investing in Your Startup
Chapter Seven Excerpt: Startup Muse available from Amazon
Over the course of my career as an entrepreneur and advisor, I’ve had the opportunity to meet with scores of entrepreneurs looking for seed investments, usually after they’ve struggled to raise capital. When I ask what they’re hearing from the investment community, they repeat a litany of excuses they’ve heard from angel investors — almost all of them are, forgive me, are outright lies. Worse yet, many entrepreneurs take these ‘excuses’ to heart and adjust their businesses accordingly — often distracting founders from their real challenges and opportunities.
Early stage startups, by definition, are almost always missing the keys to their success — angel investors can see past the shortcomings and attempt to provide the care and nurturing startups need to unlock their success. Investors focusing on early-stage investing understand this reality and accept the associated risks in anticipation of outsized rewards. If an early stage investor is suggesting he would invest if your company was farther along, he’s not telling you the truth — your “stage” isn’t the issue, as his investment strategy is, in fact, early-stage — he’s simply attempting to be polite.
For example, if you pitch your startup to Mark Cuban he’s got to make a split second decision whether or not to invest more time with you and your company — time is the only thing he can’t buy. There are a million reasons he might not be interested in your deal but a majority of the time, he will likely blame the fact that your company is pre-revenue. In reality, this is rarely the reason he is passing on your deal. Almost all early-stage early-stage startups are pre-revenue because they’re early stage and the “revenue” objection is perhaps the most common excuse used by investors to pass on a deal. Investors, like Mark Cuban, know that those who will eventually take the early risk and help you get to revenue aren’t going to be willing to let new investors like themselves buy their stock at the same price they paid. As a result, regardless of what they say, they were never going to do your deal.
Angel investors make bets on amazing teams working on “billion-dollar ideas.” They aren’t able to make bets on proven teams running “billion-dollar solutions” that generate millions of dollars in revenue, because those deals are too expensive. For example, an angel investor who invested in Uber’s seed round would have seen their investment grow exponentially. Often considered one of the best investments in history, Uber’s early investors took a huge risk and as a result, got a huge return. Those who waited until the model was proven made a fraction of the return those early investors received.
Early stage investors invest because they believe that, with their help and their capital, you’re going to be able to turn your idea into a huge company. There is something about you, your co-founders, and your idea that convinced them that you could make them money. Usually, it is just a feeling and not some tangible thing they can put their finger on. If they say they’re worried about a lack of revenue or some other issue, they’re lying. The truth is that they’re just not convinced that you’re going to be successful — period.
Most startup founders imagine a future version of their company that can tackle any number of opportunities and challenges and they pitch this version and not the reality. Ironically, most investors will imagine a future version of your company far more enticing than most sane founders are willing to pitch. The truth is that smart investors are looking for founders doing one thing really well — they assume that with their capital and their advice, founders will be able to achieve their objectives — as well as the investor’s goals!
Don’t get me wrong, you’ve got to sell a big vision, but don’t fall into the trap of selling a big company. If you listen carefully, you can usually uncover an investor’s real objections to your deal. In my experience, an investor’s questions tell you more than their advice. Once you’ve pitched to several investors, you’ll start to hear the same questions over and over until you start to modify your pitch. Some of these questions will be showstoppers — until you can answer them, you’re not going to make progress with investors. For example, when I was in my twenties and pitching my first startup, I received a lot of questions related to my team. I fumbled through various answers, but I wasn’t addressing their unstated concern — my failure to answer this question seemed to extinguish their interest in my deal. Eventually, after five or six pitches, I realized they were asking if I would be willing to step aside and hire a real CEO at some point. I started including a hiring plan in my pitch that included recruiting an experienced CEO down the road.
Interested investors are looking for angles you might have missed by asking questions. Uninterested investors will simply share objections and excuses — there is no reason to spend more time with these people. If an investor is asking questions, it is highly likely that he or she is looking for the angles you have missed — you should focus your energy on the people who are asking the questions. They’re looking for ways to make your company more valuable after they’ve invested their capital. Early stage investors often see themselves as partners — not just investors. If they can buy your stock for a dollar and with their guidance and introductions, make it worth two, they’re going to be a lot more interested. Help them figure out how they can help you succeed.
If you’re not modifying your pitch after every meeting, you clearly aren’t listening. Don’t fall into the trap of adjusting your business model based on objections. Modify your model based on investor questions. Happy hunting.