How to overcome investors’ herd-mentality and get the first check for your startup

Photo by Ian Parker on Unsplash

Being first takes courage.

Founders need courage when being the first to tackle — let alone create — new markets.

Investors need courage when being the first to believe and invest in founders.

Oftentimes, there’s a courage-mismatch between founders and investors.

While looking for the most talented founders, many investors only want to invest after other investors have already committed funds. This notion leads to a problem many founders are facing:

If no one wants to be first, how do you get the first check for your startup? How can you overcome investors’ herd-mentality?

In this post, I’ll outline a three-step process that can help.


Word of caution

This post is not meant as a general criticism of investors. I’m one myself :) There are many courageous investors out there.

Also, some investors have actively chosen to invest at later stages. For them, it’s a matter of business model — rather than a sign of missing courage — not to write the first check.


Who else is investing?

Investors face a lot of uncertainty (market, legal, tech, team, etc.) when analyzing startups. Meaningful data to predit the future is always in short supply.

Most investors rely on a mix of research, reference calls with experts, and internal discussions. They try to evaluate every data point they can get, but there is only so much they can do. When it comes to early-stage investing, the uncertainty will always remain high.

Seeing that other investors — ideally ones with a successful track record — have already invested in a startup is seen as a strong signal. It’s one of the most convincing data points for many investors when making investment decisions.

What if you haven’t found your first investor yet? For many investors, that’s a no-go. They don’t feel comfortable being the first. They want social proof.

Fred Wilson, arguably one of the most successful VCs of all times, has a strong opinion on this. I couldn’t agree more!

“I am not big on social proof. I think it is among the dumbest notions in all of investing. If you can’t figure out why you want to make an investment on your own, you should not be investing.” — Fred Wilson , Union Square Ventures

What differentiates the early-stage investors that feel comfortable enough to be the first investor from the rest?

Courage.


What can founders do?

The overall goal is clear: Find a courageous investor who is willing to be the first to commit to you.

I won’t pretend that there is a magic formula to do so. By the way, there never is a magic formula :)

However, the following three-step process might help increase your odds.

1. Understand investors
2. Filter investors for fit & courage
3. Push investors for final answer
Repeat if needed

Now, let’s break down this process and look at the different steps.


Step 1: Understand investors

There’s an imbalance between founders and investors in that investors have a much better understanding of founders than vice versa. This is only natural. Investors — in particular, those who invest for a living, such as venture capitalists (VCs) — have dealt with many founders over the years. You, on the other hand, might be dealing with investors for the first time.

Try to change this imbalance (at least a little) by learning about investors.

The better you as a founder understand investors — their interests, motivations, structure, and pain points — the more informed decisions you can make.

Doing your research here can really pay off. Luckily, there are many (free) resources to educate yourself about investors:

  • There are many good entrepreneurship blogs, e.g., here on Medium.
  • Talk to friends that have raised capital before. If none of your friends have, try your alumni network or approach people at startup events.
  • Directly talk to investors (not when you are looking for an investment but beforehand).

Finally, here’s a video of a talk I gave earlier this year that might be a good starting point. In it, I cover the following topics:

  • What exactly do venture capitalists (VCs) do?
  • How does their business model work?
  • How to get the attention of a VC?
  • What should a good VC have to offer?
  • How to choose a VC?
  • How to negotiate with a VC?
This video aims to help founders better understand investors (Filmed at Startup Europe Week in Cracow, 2018)

Step 2: Filter investors for fit & courage

More is not automatically better.

Every single day, investors get spammed with generic e-mails that founders send out to 100 investors at a time. No one likes spam. Investors are no exception here.

Focus is everything.

One personalized e-mail easily beats 100 generic e-mails.
Approaching one investor in whose precise sweet spot you fall beats approaching 100 random investors.

Don’t just contact any investor whose e-mail address you can find online. It’s a waste of time. Yours and hers.

Chris Moody wrote an excellent post on the topic. Here’s the key point:

“ The most common mistake is that entrepreneurs often violate what I call The First Rule of Engagement. This rule is based around the notion that the results you will get out of any given communication are directly proportional to the amount of energy you put into it.” — Chris Moody, Foundry Group

As a first step, make sure you fit the specific investment profile of the investor that you want to reach out to:

  • Stage: Does this investor invest at your current stage?
  • Geography: Does this investor invest in your region?
  • Industry: Does this investor invest in your industry? Does this investor generally prefer high tech or low tech? Does this investor generally prefer hardware or software?

Once you have a longlist of investors that match the basics, go one level deeper:

Knowing that many investors shy away from being the first, try to find out who the courageous ones are. How can you do that?

Look at their track record:

Have they written the first check before?

Check out their website and browse to the portfolio section to learn more about the startups they have invested in. Also, check out startup funding databases, stories on startup blogs, and whatever other data points might help you evaluate if they have been the first/ lead/ only investor before.

Make reference calls:

Investors make reference calls all the time. We talk to tech experts to learn more about your technology, industry experts to learn more about the industry you are tackling, former colleagues/ bosses/ classmates of yours to learn more about your social skills.

Start making reference calls yourself to get an impression on how courageous an investor is. For example, try to talk to founders the investor has previously invested in or investors the investor has co-invested with.

The better you pre-select your potential investors for fit and courage, the higher your odds to secure that first check.

Step 3: Push investors for final answer

“Yes” is the answer you want to hear when asking an investor to invest. It’s the best outcome, the outcome you are hoping for. Unfortunately, it’s hard to get, as I’m sure you are well aware of.

Interestingly, “no” is not the worst outcome. In fact, a quick “no” is the second best outcome. It’s a clear sign for you to move on to other investors. It’s a clear sign for you to not waste your time on an investor that’s just going to keep you busy but won’t invest now (or ever).

Unfortunately, many investors won’t give you a quick “no”. Why? They have little to gain by doing so. First, it’s uncomfortable. Second, they don’t want to risk being the ones that explicitely turned you down if you become the next unicorn. Third, and most importantly, they want to keep all options open. They will say something like:

Sounds good. Keep me in the loop.

This sucks. You didn’t get a “yes” and you also didn’t get a “no”. You got a “let’s wait and see.” Not helpful.

I highly recommend asking your potential investors for specific feedback, e.g.:

  • What more information do they need from you?
  • When can they give you a final answer?

Be polite but don’t be afraid to push them for clear answers. Simply “keeping them in the loop” is not going to turn them into your first investor.

The more specific questions you ask, the better. For example, you could ask:

  • So what would I need to show you to get to a “yes”?
  • So if I show you xyz in 3 weeks, this will be a “yes”?

Mark Suster, a great VC, recently published a good article on the topic. Here’s the quote that best elaborates on this point:

“People are afraid to hear ‘no’ so they don’t push hard enough. You need to be polite, but if you respect yourself you’ve earned the right to ask the awkward questions about where you stand and what comes next. If people tell you ‘no’ as a result of a polite push they were going to say ‘no’ anyways. But often if they don’t say ‘no’ you’ve just got yourself a commitment to re-engage.” — Mark Suster

Free options generally don’t exist in financial markets. Why should they exist for investors that most likely won’t invest in your startup? Right, they should not.

Try to get your potential investor to a “yes”. If that doesn’t work, you are better off with a quick “no” than getting stuck in an infinite loop. This loop only means additional work for you but is not likely to get you an investment. (I’m sure you can use the additional time this would require for a million other things to push your startup further).


Putting it all together

The overall process looks like this:

Three-step process on how to get the first check for your startup (Marcus Erken, Sunfish Partners)

Repeat

Many (now successful) founders I have talked to had to pitch to more than 100 investors before getting their first check. Hence, you might have to repeat the outlined three-step process. Maybe once, maybe even multiple times.

That’s not fun. I get it.

Isn’t it ironic that ‘fun’ is part of ‘fundraising’? Fundraising isn’t fun. It’s tedious, but necessary at times.

However, you will get better over time. Promise!

  • You’ll have a much better understanding of investors.
  • You’ll be more experienced in filtering out the best possible matches for you.
  • You’ll be better at approaching investors (Sales can be learned!).
  • You’ll be less anxious to push for a final “yes” or “no”, and move on.

The good news

Herd-mentality works both ways.

Once the first (good) investor is on-board, herd-mentality starts to work in your favor. Now, other investors are more likely to invest simply because of social proof.


#courage

Courageous founders who take on grand challenges deserve courageous investors.

I try to be as courageous as the founders that I want to invest in. I don’t always succeed at this. I, too, have fallen prey to herd-mentality before but I’m constantly getting better.

If you’re a courageous founder, try me :)

E-mail: marcus [at] sunfish-partners [dot] com
Twitter: marcuserken

Please also reach out if you are a fellow investor who wants to chat or share notes.


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Acknowledgements

Life is a team effort. So are good blog posts. Thanks very much for your feedback on this article: Dennis Zeiler, Jessie Stettin, Corinna Erken, Rachel Kuhr, and everyone at Sunfish Partners.


About the author

Marcus Erken is a founding partner of Sunfish Partners, an early-stage VC that invests in Polish tech startups (#deeptech). Marcus is also a lecturer in the field of entrepreneurship; he currently co-lectures two university courses at WHU in Germany.

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