The current startup environment is extremely competitive, especially with investors becoming more conscientious about which ideas they choose to support with funding, expertise and network connections. From a personal standpoint, I can look back on startups I’ve invested in previously versus the ones I invest in now, and my strategy is much more conservative and staggered.
Over the years, I have gained experience on both sides of the table. I’ve been both the hopeful founder and the practical investor. So I want to share a few insider tips to help entrepreneurs get into the right frame of mind to capture and retain investor interest.
1. Be honest, passionate and moldable. Investors like these qualities.
Attitude is just as important as data. It’s common for entrepreneurs to feel like they must oversell their projects to investors. In some cases, they intentionally inflate the numbers and data in order to attract more attention.
However, it’s always better to approach potential investors with an honest portfolio of numbers and the right attitude—especially since experienced investors can easily see through these tactics and know how to verify the data they’re given.
In the case of startup incubators, especially, founders should be amenable to taking constructive criticism. It is best to have a willingness to be molded, both personally and from a business perspective.
For instance, I recently watched a presentation from a founder whose target market was the whole world. While that’s obviously not feasible, the founder’s ambition, passion and commitment were obvious. So, if they were willing to listen, narrow their focus and follow our recommendations, then that would be considered a much better investment than one with good numbers but a founder with a fixed mindset or poor attitude.
2. Don’t try to ‘game the system’ by using funds to develop another project.
A problem that investors must deal with is an entrepreneur’s shifting focus. While entrepreneurs are always interested and extremely focused on their initial startup at first, it is common for founders to start doing other projects in parallel with the one we have partnered on. This has even happened with projects in which we were legal co-founders.
This kind of divided focus is not only bad for both of a founder’s projects, but it is an unprofessional look that can give an entrepreneur a bad reputation as well. Taking an investor’s funds given for one project and diverting them to the development of a separate project is a red flag and something that investors generally do not appreciate.
Often, this behavior comes from a mistaken belief that once they have investor money and access to a certain level of expertise, they should use these resources to develop another company to make more money faster. It’s a misguided attempt to get results that leads to poor outcomes all around.
While there are no laws against this, it’s important for founders to understand that this is not the norm, nor is it behavior that seasoned investors will look upon favorably. The best course of action is to be transparent and focused on the task at hand. It’s a bad look to try “double dipping.”
3. Don’t balk if the number offered doesn’t match the number you asked for—there’s usually a good reason for the difference.
Veteran investors likely know better than you how much money your business actually needs.
Even founders with the best intentions and thorough analyses may not fully understand how much capital they need to succeed in their chosen market. This is one reason investors ask so many financial questions during the initial phases before any funds are given.
In our case, we ask about spending for two main reasons: First, we want to get a feel for how well the entrepreneur understands the financial landscape of the market they’ll be entering. For instance, a tech startup in Los Angeles will have wildly different operating costs than one in a smaller town on the East Coast. Second, we want to gauge how much our initial investment will likely need to be.
Sometimes, a founder will name an amount for a three-year runway that we know will run out within the year simply because they don’t understand the geographic market well enough. In other cases, we may offer less than the founder asks for. This often has nothing to do with how much we believe in a startup’s potential. Instead, it’s a reflection of our overall investment strategy and how much capital we think is needed for the proposed timeframe.
For instance, we recently committed $500,000 to a productivity startup delivering an innovative way for users to improve their workspace. It is an idea that we love, and it aligns well with our overall investment strategy. The amount we offered was based not only on what the founder believed he needed but what we thought was appropriate for the company’s current and future goals.
It’s worthwhile for entrepreneurs to stay open-minded, curious and willing to collaborate when investors are interested.
4. Do your best to build rapport with every investor you meet, even if they give you an initial ‘no.’
Сash isn’t the only valuable resource investors can offer. In many cases, a “no” from investors isn’t a hard no. Often, it’s a “wait and see” strategy because we want to know how you will handle yourself in the near future.
Other times, we may not be ready to offer cash, but, if we like your pitch deck and attitude, we may be willing to offer connections or resources you might not get access to otherwise.
Founders and investors alike are strapping in to ride the rollercoaster of the global economy over the next few years. This means both sides of the table have to adjust expectations and put in additional work to see success.
As a founder who is now the CEO of a startup accelerator, I know how important it is to grab investor attention right away and how challenging it can be to keep it. The tips here are tried and true for me on both sides of the table.