WTH Actually Matters to Investors?!

You’re an early-stage founder working on bringing an idea you had into the world. Did all your market research, put all the time and effort into bringing your friends in, and have been working together for months to get it to a point where you think you need an investor. And so you go looking but keep getting rejected by investors. They love meeting you, and enjoy hearing your 2-3 min pitch at events, but are either not inviting you for follow-up meetings or not investing even after they invited your whole team to meet them. And that’s when you ask yourself “WHAT THE HELL Actually Matters to Investors?! Why are they not investing?! What are we doing wrong?!”

It might simply be the kind of investors you are approaching. Just like you created the Ideal Customer Profile, you should also create an ideal investor profile that answers questions like – What do they invest in? What kind of startups have they previously invested in? What is the best way to reach out to them? and then answer the questions What do they look for?
In the end, I will share- Why don’t they invest if they say they like the startup so much?

What They Invest In

This can be as simple as figuring out the geographical location, sector, and startup stage that they invest in as well as the typical investment they make in each startup. This is easy to find by going to the particular VC’s website or searching on OpenVC, or looking up angel investors’ profiles on platforms like Angellist or on the website of your local angel network. For me, you can check this post on what I look for.

I can help you get in front of other investors

During the 1-on-1 meetings address potential red flags preemptively and proactively counter common concerns like part-time commitment, ad-centric revenue models, lack of focus, overlapping investments, high capital requirements, or inflated valuations.

Startups They Invested In

Go to the investor’s website of socials and you will typically find their portfolio to give you an idea of what they have invested in so far and what resources you need that an investor should be able to offer you – help with marketing, industry connections, advisors, hiring more people, etc.

Best Way to Reach Out

If you have a connection to one of the founders in their portfolio, ask for an intro, which is called the “warm intro” vs doing a little internet sleuthing to find the best way possible to reach out to them, wherever they seem to be more active- email, website form, LinkedIn, Twitter, Telegram, etc for “cold-calling”. If you are looking to target a wide pool of investors reach out to a startup coach who might be able to make an introduction if you have worked with them.

Securing a warm introduction adds weight to your pitch and boosts credibility.

Need help reaching investors? I can help

VCs can be swamped, frequently multitasking between appointments. So keep your cold outreach concise and impactful till you get a face-to-face meeting. Do some research and tailor your approach to match the VC’s preferences. Send a personalized email showcasing your startup’s alignment with their interests and present your business in a single line, follow with bullet points highlighting your value proposition, pilots, and traction, and conclude with a clear call to action. Respect their time and make your mark.

Pitch events and networking events are also great ways to find an associate from a VC firm and use them to find a way to talk to the higher-up decision-makers in the firm.

What Do They Look For

So what are some of these things that investors want to see from you?

The answer to all of them could be yes! *cue ominous music*

This is perhaps the only thing you as a founder can control. Depending on the type of investor, and at the stage they are coming in, investors look for different things but eventually, they will look at all or some combination of them to make a final decision.

So you could have done a really great data room and pitched an amazing business plan that is unique and filled with potential, but if the investor doesn’t believe in you or your team’s ability to execute that plan they will pass on the investment. If they think you lack the passion or the personality to do what is required, or they simply do not understand your product because the demo was confusing, meaning you lack the ability to explain your product well to the wider market, they can still pass on the opportunity to invest in you and might not actually share the reason why they didn’t invest.

Why don’t they tell you, or give you negative but what may be very constructive feedback?

Because they don’t want to hurt your feelings. They might ghost you, because they don’t want to seem rude but if at a later point want to invest in you, it gives them plausible deniability to still maintain good relationships at that stage. Some founders don’t take feedback well and respond negatively so many investors don’t want to deal with it and find it easier to ghost.

So what can you do if investors don’t tell you what to improve:

  1. Ask them. Maybe they respond if they don’t ghost. But if you never ask you’ll never know.
  2. Add them to a newsletter so they get monthly emails from you on the progress your startup has made. This is a good way to show advisors and investors that what you are doing is working and that your team is actually making progress. It validates your team structure, your coachability, your MVP, your market, your passion, your business plan, your strategy, your ability to execute what you said you would, and your ability to survive and use innovative ways to run your business even without investment. Even if the progress seems slow and not very impressive on paper, still share it as they may be able to connect you with people who can help.

Founder-Team-Product-Market-Execution-Stage Fit

Investors are typically looking at these 6 criteria to make sure they fit together with what they believe in. They might not always be looking for all six but they are definitely keeping track of them even after investment to see if you will get more the next time you come to raise from them whether it is for the next stage of your current startup or a new company down the line.

Founder

These are things that investors are looking for when they look at the personalities and passions of the CEO, COO, and/or CTO (especially in a tech company).

How you respond to their questions and doubts about your business is just as important as what you respond with. If you are annoyed at their questions about your business and give them the facts they ask for, technically you did give them the answers but your personality makes them question what kind of person you are who gets annoyed when the littlest things don’t go your way. Are you immature, are you entitled, are you lying, are you scamming them, are you being facetious or coming off as unreliable with loose ethics?

Having an optimistic, cheerful, grateful, not a “burned-out-from-running-business-need-investment-to-fix-all-problems” attitude is important. So reflect on why you are in the business, if its something you are actually passionate about and enjoy doing and not simply jumping onto the latest media hype, ask yourself the 5 Whys and figure out if this is truly what you should be doing, maybe you should change your role in the company, or pivot the idea, or do something else entirely.

Ask yourself:

  • Are you the right person to be running this company?
  • Do you have the personality to do whatever it takes to run it and find ways to make sure it survives?
  • If you are an introvert who hates public speaking, should you even be CEO?
  • Are you coachable, and willing to listen to and discuss sound advice that someone else is offering while you are in the early stages of your first-ever business?
  • How frequently do you communicate with your team/ customers/ advisors/ investors and keep them informed of what is happening in your startup (good or bad)?
  • Are you a first-time founder or have a history of starting other ventures (whether successes or failures)?

And is what you are trying to convey actually coming across in the way you intended or are you being misunderstood because you lack the ability to talk to people in a way that they understand and throw too much jargon around that other people might not get?

CEO needs to be able to convey their thoughts to everyone in a non-tech way as if talking respectfully to their old grandparent without getting frustrated at their lack of not knowing the tech words you know. CTO can usually get away with conversing in technical jargon with investors, but should still keep it to a minimum unless they know that the investor understands their technology well enough.

Team

  • The skills of the team, what makes them a good fit able to work together?
  • Have they worked together before or are they life-long friends?
  • What individual skills and experiences make them the right person to be a part of the founding team for this business?
  • Do they have industry insights that no one else has?
  • Do they all understand the problem well enough?
  • Does everyone have complimenting and overlapping skills?
  • Do they have a reputation as a thought leader in the industry in which you are starting the business?
  • Do they have an amazing network of potential advisors/ customers/ users/ investors/ employees in the industry you are targeting?
  • Does CTO have the tech skills to build something no one else has before, enough to build the product faster than anyone else and lead a team of engineers as you acquire more employees?

Product

Everything you can think about the product.

  • Is it a single product, or a suite of multiple products?
  • Target features, and why those specific features?
  • Pricing, why that pricing, profit margins?
  • The process in creating the product
  • MOQ needed to bring down the price and increase margins if a physical product, how will the increase of that MOQ impact your business and logistics?
  • How will your product offering grow in the future, will you add more features or more products to your offering for the customers?
  • Is what you are building 10x better/ faster/ cheaper/more efficient than what exists right now?

Market

  • Who are your target customers?
  • Why are they your target customer segment?
  • How much is it costing you to find or market to them?
  • How much revenue is each of them bringing in on minimum, maximum, and average?
  • How do you stay in touch with your customers?
  • How frequently do you seek customer feedback and act on it?
  • What is your market share?
  • How will you grow your market share?
  • What is your marketing plan?
  • What is your business plan and business model canvas?
  • Who are your direct and indirect competitors?
  • What’s stopping your existing competition who is already in a similar field with possibly more resources from doing what you are doing?
  • What will stop new startups from emerging in the field you are in?
  • Do you have a moat in a blue ocean market?

The sector you operate in may not be one that they invest in so keep that in mind, and approach either investors that are sector agnostic (aka all sectors) or specific to the sector where you are trying to make an impact.

Execution

  • Which metrics do you track, why those metrics, and how have they improved over time?
  • What do your logistics look like?
  • How are you delivering your product to customers?
  • How are the customers finding you?
  • Is the revenue and profit margins enough to keep your operations running (albeit slowly) for the next 5 years even without an investment?
  • Do you have exclusive partnerships that are so amazing that they will leave your competitors in the dust? How long is this strategic partnership expected to last?
  • What are you doing that’s working and what would you hope to improve?
  • If there are things that need to be improved anywhere in your business’s operations, what resources do you need to improve them, and how long will it take you to improve them once you have the resources you need?
  • What is your plan to launch the product in the market?
  • How are you getting the products into the hands of the customer?
  • How are you executing your marketing plan and what have you learned from it so far?
  • How frequently are you updating your marketing and business plan?

Too much? That’s what Coaching helps with

Intro Call
Consultation
Coaching

Stage

Even at Pre-Seed/ Seed investors may look at founders differently. Serial founders who have proven themselves may get more funding than first-time founders, and if first-time founders try to raise the same amount of money at the same valuation, they might have to give up more control of their company in return.

You can hope to raise a similar amount to what a direct competitor at the same stage has raised in the last 6 months, BUT you also have to justify why you need that money. So try to raise by what you need for the next 18 months, not what you read in the newspapers about your competition as they might have had a better full-time team, better IP, stronger business, or go-to-market plans than you.

At this stage, you may not have any metrics to show for your startup so a lot will depend on you, your team, your team’s ability to be coachable, an investor’s belief in your prototype which may be ready for market testing, or the metrics you have discovered from an MVP and the traction it is getting.

You most likely will not have the product market fit (PMF) early on so the analysis is more focused on your financials and the potential for your business and technology, your strategy for the future and growth of the company, and most importantly belief in your ability to execute that plan.

At Series-A any operational issues you had should have been fixed so the focus at that stage will be on your current metrics and plans to grow the company, financial and growth projections, and the long-term plan. Investors will want to know what the exit plan is, and how you see the company growing to the point that investors get 10x or 100x their money back.

Deal

I have shared already discussed what factors can make or break the decision if investors want to invest in your startup. But of those, the top priority is usually on how much you are raising and if the equity you are offering in return is going to give them the returns they need when they exit.

  • If what you are asking for is beyond their usual check size they want to make sure you have other investors on board
  • If they are not the lead investor they want to talk to whoever the lead investor or maybe even previous investors are to determine if everything is good with the company and that progress is being made
  • If you get investors at the pre-seed and seed stage, they won’t want to get too diluted when new investors come in later, so they might ask for more rights, like Pro Rata, and more decision-making power in the form of a board or advisory seat
  • If you offer them 5% in exchange for $X, but they only invest $X amount in companies if they get 10% or higher and you cannot come to a compromise during negotiations, the deal will not go through
  • If your cap table is too messy, say if you raised through SAFE notes 3 times but offered every early-stage angel investor a different deal, it might get too messy when VCs come in, even though it is not too bad of a problem but it can slow down the whole process where they might have to negotiate with more people depending on the rights those investors have, or possibly in the rare case buy out the shares of the previous investors, giving them an exit and starting from scratch
  • If you didn’t monitor your cap table and it got so messy that you as a founder actually lost control of a major portion of the company early on, it puts the investors in a bind on whether you will be able to make decisions going forward, because after all they are betting in the founders’ vision and want to make sure your team stays at the helm of the company

Some red flags investors are usually on the look out for include:

  • Are you making little white obvious lies?
  • Are you constantly changing your customer segment?
  • Have you been involved in past scams?
  • Misaligned data with what you’re saying
  • Non-relevant people on the Board of Directors
  • Shady accounting

Timing

Even after you score amazingly on all 6 criteria and the investor loves you and your startup, and they are happy with the deal, timing can still be a factor in raising funding. Not your timing, but the investors’. Let me explain.

VC firms have big pools of money called funds, don’t worry how this pool of money was made, but for easier understanding let’s call it a bank account. When a VC firm starts it has 1 bank account that stays open for 10 years but the investors can put money from this account into startups usually only for the first 5 years, after which they want the startup to exit and give them the money back in that account in the next 5 years. Every 2 to 4 years the firm creates new bank accounts each with a 10-year life, so some of their accounts are just getting opened while some are in the process of closing. Money from one bank account does not go into another account. Here’s how the timing of this influences investment decisions:

  1. Assume, Bank Account #1 is used to invest in pre-seed or seed-stage startups. This means if you are raising Series-A at that time, they might not be able to transfer money from Account 1 to you.
  2. Now in Year 3 since the VC firm’s inception, they also have Bank Account #2 as well
    If they use Account 2 to invest in Series-A startups and you contact them now and are raising seed funding they will be able to give you money from Account 1 because that’s still open, and if you are raising for Series-A they can invest money in you from Account 2
    If Account 2 was also meant to invest in the seed stage and you are raising a seed round, then they can use either account to invest in you or split it between the 2 accounts. Luckily you don’t have to worry about that because you’ll get the money. But if you are raising Series-A they still can’t invest in you because they don’t invest at that stage through any of their accounts
  3. Well-established firms usually have multiple accounts, each focused on different stages that they will invest in so you are likely to get your money one way or another if you are a good fit for what they invest in from any of the accounts. But smaller VC firms do not have that luxury and only have 1 or 2 accounts in the first 5-6 years. This means they have to think about how they will give you the money, and they have to be very selective about the startups they invest in, so even though they like you, can offer you better deals, and can have a more active role in the growth of your startup than bigger firms can, they simply don’t have a way to invest yet but will maintain a long-term connection with you, to make sure they can come back at a later stage because they WANT to be a part of your company. You will want to make sure these people are in your corner and on your newsletter email list
  4. If a VC firm only has one account and never opened account 2, then they can invest in you only in the first 4-5 years. So if you go to them in Year 6 they will still take meetings and act like they have the money to invest but will pass on you for a random BS reason even though they like you. If they are never planning to start account 2 then keeping them updated on what you are doing will not help much, but you can still have long-term relationships with people associates and analysts in that firm if you like them because if that person moves to another firm, you can still be on their mind
  5. If you go to them in Year 4, they can still invest in you, right? Yes, BUT if your exit plan requires you to scale for the next 9 years before you can give them returns and they only have 6 years left in the life of that account for you to generate the returns, it won’t work
  6. Most of the time, but not always, they keep a portion of the money in the account for a later stage in the best existing portfolio companies. If you raised seed from them in Year 4 and are ready to raise Series A in Year 6, even if they have only one account for seed investments they might have some money to give you at Series-A if they still like you because you have kept achieving your targets as promised, and they think you should get preference over other startups in their portfolio at a chance to use that money for growth because you have the potential to return them more money in the next 4 years before that bank account closes

All of these factors together can determine if you raise money from an investor. Make sure you go through all the other posts I have linked in this post because you will need it.