Investors’ decision-making process

Photo by Domenic Blair on Pixabay

As human beings, we can make different kinds of decisions: unconscious decisions, like walking, and more conscious ones, like investing in a startup. The latter clearly requires more cognitive effort than the former, and knowing some of the underlying dynamics can be helpful in many scenarios.

Let’s imagine you are a startup who recycles plastic material from the ocean into furniture. If you want to grow bigger and extend the reach of the objects you build, you need investment. You prepare an elegant white paper, a PowerPoint presentation and well calculated data. Potential investors listen to your idea and evaluate the pros and cons. Ultimately, they make the decision whether to invest or not. Unfortunately, business is a tough environment and convincing investors is not the easiest thing to do. In this article, we’ll analyse the most relevant factors that drive an investor’s decision. Our great minds are capable of thinking of a process as a whole — but we are also capable of dissecting it into small pieces in order to analyze the many interlaced factors within. Therefore, we are going to do the same, by breaking down the decision-making process into three stages: synthesis, analysis and value.

1. Synthesis

The first stage of decision-making is to collect data and make sense of it. The brain looks for coherence, relevance and patterns in the information. Hence, the startup which recycles plastic from the ocean must have a white paper that is free of confusing information and logically structured. For example, it would be useful for the investor to understand what recycling method is being used, but a detailed analysis of the chemistry involved would be overwhelming. If no extra cognitive effort is required to process your message, an investor is more likely to be intrigued by what you have to offer and understand the relevance of your product. On the contrary, if you overload the investor with information, he/she may overthink the proposal, and overthinking kills ideas.

Try to be confident while presenting, but avoid sounding arrogant. Unfortunately, there is a fine line between confidence and hubris. If you are perceived as arrogant, an investor may make a judgement based on your personality rather than your product.

2. Analysis

Once a global understanding of the topic has been established, the information is dissected further to look for connections with what you already know. New information is placed into pre-existing mental categories and adjudged to be either beneficial or detrimental. At this stage, the prominent questions which arise are financial and managerial: “What is in it for me?”, “What do I have to lose?” and “How much effort is this going to be?”. Your startup has to foresee these questions and provide convincing data and graphs that show the many benefits (financial and environmental) of your project. Also, the investor is going to think long-term and needs to be reassured that you know where your business will be in ten years. Hence, try to make predictions about potential future growth and demonstrate that you know your numbers and can be trusted.

There is an interesting effect called the “framing effect”, which posits that for an investor, the psychological impact of losing money is much stronger than the impact of gaining money. For example, you would clearly be happy if I gave you twenty dollars, but you would be much more sad if you lost twenty dollars. Thus, the psychological impact is disproportionate. In fact, you would more easily forget that I gave you money than forget that you lost some money. This fear is accentuated in the ICO realm, in which many startups failed to deliver the promised results. Reports say that 46% of ICOs went out of business 2017 and many turned out to be scams. From an investor’s perspective, this feeds scepticism and caution about commiting to an investment.

Another burning question is usability. Does the investor see any use for your product? How does your idea differ from what already exists out there? Who is your target market? Make sure to stress how unique you are and how useful your product could be in a specific field to specific people. Remember that it is better to have a strong appeal to a small, but committed user base than to have a weak appeal to a larger group of people.

3. Value

Trust is a relevant keyword that relates to both the rational and emotional spheres. By now, the investor has rationalised everything you said (clarity, revenue, risks and usability), and you have hopefully begun to gain his/her trust. Now, it is time for emotional evaluation. If your product matches the investor’s personal values, he/she is more likely to feel empathy towards your ideas and invest. Emotions are a powerful tool in business. For example, you are less likely to invest in a startup that recycles plastic from the ocean if you are indifferent about the environment and animals affected by the problem. Emotions are no less relevant than the numbers and the structure of your presentation. Having said that, the investor doesn’t have to completely share your worldview, but needs at least to feel emotionally satisfied with the idea of investing in your project.

The best piece of advice is to prepare everything in detail and anticipate the possible questions which may arise. Your visual material needs to be precise, but not overwhelming. Your presentation needs to follow a logical structure and keep the attention of the investor.

While you may still need a slice of good fortune to get over the line, to a large extent you make your own luck. Humans are not completely rational and our minds are subject to psychological biases. As a startup looking for an investment, this can work to your detriment or in your favor. Decision-making is a multi-stage process, therefore, knowing the different phases can help you anticipate possible issues and ultimately reach your goal. At THE RELEVANCE HOUSE we build your marketing strategy and know what investors look for. Learn more about us here.

THE RELEVANCE HOUSE is a full-service blockchain marketing consulting agency for startups conducting an ICO. The focus is to guide blockchain startups in building, designing and delivering a relevant brand and story. Because only relevance has impact. We look forward to hearing about your project. Contact us, we don’t bite!

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The Relevance House

The Relevance House

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We’re a full-service marketing agency for the blockchain and emerging technology sectors. Building, designing and delivering relevant brands and stories.