Your startup needs funds to cover 12-18 months of runway until you complete your next milestone. After you pitch, you could be the founder whose head swirls with questions like: How do investors see my business? Who are those investors? Why would they choose my startup? How do they make investment decisions? How do I make the business stronger?
But if you already led customer discovery to nail down these types of questions with customers before you started selling, you could do the same thing with potential investors before you start raising.
Think of it this way: instead of selling a product to investors, you’re selling equity in your business. Who do you want a relationship with? Take them to coffee long before you open your round. Read about the deals they’ve won recently. Ask questions that put you into their shoes. When I was a founder, I saw everything through “value creation” glasses. That kept me from seeing my team through investors’ eyes.
Now that I’m an investor on behalf of a small fund, I wear different lenses for risk assessment. Instead of asking, “What if? How delighted would you be?”, I now ask, “How do you know that? What if you’re wrong? What’s your plan B? How likely, impactful and detectable is that?”
Here’s what I learned from my first round of coffee cup chats with early-stage investors. Most startups fail. [1] 75% shouldn’t get funding at all. No one knows which startups will succeed. So, investors take a portfolio approach to spread the risk. They make 10 investments to get to a 2X-3X cash return in five to seven years, but up front each investment must look capable of returning 10X+. And the investor must save enough capital to follow on with the ones that look promising later.
For every 10 investments they make: five fail completely, two return the original money, two return 2-3X as much, 0.9 returns 10X, and 0.1 brings back more than 20X. All the big gains cover the losses, but it’s not a windfall on average. Again, they honestly don’t know which ones will win; each deal looks like a clay mashup of risk and reward.
So how do investors think they’ll return more cash to limited partners (their investors) than other options the limited partner had? Ask them. That’s half of the key to whether they’re a good fit for you.
You’ll get their attention through familiarity and interest. Familiarity is “I know who you are. I know how you think. I know how I can help.” Interest is the set of strategic concerns around your business and how the investor can help again. Remember, an investor brings more than just cash: relationships, talent, market landscape, pilot customers and more. It’s never too early to start a good conversation.
You’re solving problems for the investor too. Your startup may add diversity against the rest of their portfolio and offer inside information on your segment of the market. The investor might race against a clock to deploy capital, seek a strong introduction to grow a relationship with a colleague, or crave good news to put bad news in context.
Don’t take these observations as truth. Upgrade your questions. There’s an old saying: Ask for money, and you’ll get advice. Ask for advice, and you’ll get money. I’d add to the end: When you show you navigate conflicting advice from investors well.
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