Podcast 9: Inside The Mind Of A Professional Investor
Investing is personal. Make it personal. ~ Chris DeVore
Chris is not your regular seed investor. His background is as an entrepreneur himself. He raised millions of dollars for Founders’ Co-op, an early-stage venture fund built by founders, for founders in the Pacific Northwest. He also runs TechStars Seattle.
If you have never met a professional investor before or built a strong relationship with one, you will learn a lot about how investors think about you and your startup ideas.
- What’s the biggest misconception about raising money for your business? Investors aren’t just wallets flapping down the street that spends money into ideas that come along. They have points of view, they have life experiences, they have values and goals. At the seed stage of funding (usually less than $1M, and more around $100k) it is very personal. Investors are seeking people who not only have great ideas, great ambition, and great talent, but they are looking to support people who’s vision of the world squares with the investor vision.
- What do founder’s get wrong talking to investors? Too often, founders come in trying to convince the investor of an idea versus finding investors who already believe what you believe. It is much easier to sell someone who has already sold themselves than it is to talk someone into a new idea. Find that match.
- How do you do that? Read the blogs of investors before you talk to them (here is Chris’s by the way). If they don’t have a blog, read their Twitter or Facebook timelines or AngelList profile. The world is much more open now than it used to be. There is very little excuse for not doing your homework.
- What’s the one thing you can’t teach an entrepreneur? This was the newest blog post on Chris’ blog. Successful entrepreneurs have a really burning need to prove themselves to the world. At some point, someone told these people that they couldn’t and they have made it their life struggle to prove that person wrong. It doesn’t matter how much they achieve, it is about proving to the world that they are as good or better than the people who doubted them. That drive never goes away. It is not always a happy thing to have to live that life, but that fire is very powerful.
- How do you get a fundraise going? Read Influence: The Psychology of Persuasion because it is all about behavioral psychology. There is a lot of herd behavior among investors, but it is much much less true for professional investors.
- Why? How does an investor make the decision to be the first person to invest in a company? Professional investors (those who have made more than 50 investments) know what conviction feels like. They know their mechanism for getting to conviction. They know what happens when they get to conviction. Small angel investors just don’t have as much data, so it is not right to say they lack courage or conviction to make an investment.
- How does an entrepreneur find a lead investor? Stop looking for a lead. Close investors one-by-one with a convertible note which is a lighter weight way to put a round together without setting many of the major terms up front. Read Paul Graham’s High Resolution Fundraising.
- What should an entrepreneur be careful of when picking an investor? Ask yourself this: is this a person you want in your life for the next 5 years? Investors aren’t just check writers that walk away. You are creating a relationship with someone. Make sure you want to do that.
- What else do founders not understand about investors? Angel Investors and Investment Fund Managers have very different incentive schemes. Understanding the mental math (which they don’t expose to you as a founder very often) is very powerful. Angels have more money than they need and investing is about loving the people or the idea or they want bragging rights at cocktail parties. Professional fund managers have an economic platform that they are responsible for (rate of return, time window, their economics, and how much time do they have). A venture investor needs to invest their money and time in roughly equal segments, which means that venture investors have an ideal check writing size. Sometimes they can’t write a $500k check because they don’t have enough time to watch over that small amount of money. Maybe they need to write $50M checks and you might or might not fit into that kind of investment yet.
- What’s another misconception? Venture Capital firms are not a company. They are partnerships. A partnership is a collection of individuals. Every individual has their own quarks and biases. A fundraising process is an individual sales process with an individual person. You need to build a relationship with a human being, not just “accessing the capital markets.” Investing is personal. Make it personal.
- Why do some investors go cold? Nobody wants to burn a relationship or say no to somebody for fear that they can’t say yes later on. Everyone is trying to preserve optionality. Being a founder is hard. Shitting on someone’s motivation by telling them that you don’t think they have what it takes is bad karma, but I do think investors should be more honest if there are more constructive feedback people can give them. Maybe that makes me a bad investor because very few investors seem to think that way.
- What’s the biggest mistakes founders make when they pitch you? There are so many ways. Remember this is about a relationship with a human being. Investors need to feel like this is an authentic person sitting in front of you. If you try to convince an investor on the business without selling them on you, you are misunderstanding what the investor is investing in. Investors invest in you as much as they do your idea.
- When should an entrepreneur look for funding? You shouldn’t raise money when you are on the journey trying to figure out the problem you are going to solve. You usually start with a convertible note round ($250-750k) after you are a real corporation, have co-founders, and know the problem you are going to go solve. Hopefully you have built something already by that time. Then a price Series Seed round ($1M+) needs more momentum and traction behind the business. You don’t necessarily need to make much money, but people that use your product should really love it and you should be showing great growth and acceleration. Read Paul Graham’s Startup = Growth. Then there is an A-Round is now growth capital which means you are making a lot of money already ($1M+/year in revenue). The business engine needs to be working.
- What’s the best piece of advice for entrepreneurs? You find a lot more happiness following your nose and figuring out what you want from life. Many young people think they want to be entrepreneurs and they head down that path. Choose the journey that’s the right thing for you.
About the Author
Lucas Carlson is a hands-on consultant, author and entrepreneur. He helps founders discover opportunities for growth, both for their companies and for themselves. He was the CEO and founder of AppFog, a popular startup acquired in 2013 after signing up over 100,000 developers and raising nearly $10M in venture funding from top angels and VCs.