Raising money is a huge part of a startup founder’s job. And, if you ask many of them, the most painful. Part sales, part politics, part cajoling, and sometimes part begging – you have to go out and convince people to write you a check in the hopes that they will make money from doing so. And one of the biggest frustrations that founders face is not understanding why someone who was pitched said no.
This frustration came to the forefront when I was recently lucky enough to be part of, moderate, and then listen to — in that order — three informative panels on fundraising at Venture Café Phoenix. We discussed three different sources — angel, venture, and debt funding. During that last session, one of the panelists said something very simple but key to understanding what motivates organizations that startups are trying to raise capital from. The panelist said, “our investors deposit their retirement savings with us, and they don’t want to take risk.”
That is when the obvious hit me, understanding what motivates a fund to invest money in a startup is really about what motivates the person or entity that is the source of that funding. Too many founders treat money as an abstract resource that doesn’t have human baggage attached. Or worse, that it the money comes from the screening committee, fund manager, or underwriter. Both are wrong.
Get your head around the reality that it is another person’s money. And the people you are talking to in order to receive that money are legally and morally bound to invest it appropriately. And don’t assume that just because these organizations are dealing with large sums of money, they don’t care so much about the little amount you need. There is a sense of ownership attached to that money that can significantly impact investment strategy.
Learn the investors' long-term goals
And remember that the original source of capital, the angel, limited partner, or depositor is a person. And they may say they are rational and wise, but because they are human, fear, greed, and personal feelings are their real motivators. Those human aspects drive their short and long-term investment goals.
This, in turn, drives the investment goals of the entity you are trying to get a check from. To make things even more interesting, those motivations go beyond the purely financial and may include wanting to do good, a fascination or belief in a certain industry, a religious or political perspective, or just wanting to be part of something cool or making a difference.
That is why founders can be more efficient in fundraising if they ask fund investors about their capital source and what motivates that source. And then, dig deeper and ask what scares them and what gets them excited. Once gathered, take that information and decide if this source is a good fit for you and your company, and then modify how you present your ask to align with what you learned.
Building this understanding will keep you from wasting time, reduce your frustration, and get you back to building and growing your company sooner.
Eric Miller, a regular contributor to AZ Inno and the Business Journal, is co-owner of Tempe-based PADT Inc.
