February 15, 2017

The Investor Mindset

Let’s suppose that you were an investor with a small $5.0M to invest instead of an entrepreneur looking for money.  And then let’s suppose some entrepreneur approached you and asked you if you would consider investing in his/her business.

Interesting turnaround, huh?  Now you have the money and are trying to determine where to invest it.  OK, here is the first issue. You are entrusted with this money in order to provide a return for people.  If you don’t provide a return, you don’t get another fund.   Second, if you were this investor, this is certainly not the only entrepreneur that would be trying to get you to invest.  Instead, this might be the tenth one this week.  And guess what?  They all had great ideas.  Remember: “A good idea is a pre-requisite for investment, it does not get you one dime in investment.” – me

So, if you were this investor, what is the number one thing that you are thinking?  Well the number one thing is likely to be: “if I put in $1.00, how do I get back at least $10.00.”  Not, is this a great idea?  Do I like this person?  How can I help this person?  It is a pure financial decision.  You want a return.  Does a good idea get you a return?  No.  Execution on the good idea gets you the return.

But when entrepreneurs go out for funding, they almost always lose sight of the primary objective of their intended audience.  They talk about everything but what is on the investors mind.  After you do the pre-requisite discussion about why yours is a great idea, the rest of your time with the investor (whether one meeting or all the way through due diligence) is strictly about execution.  The investor wants to know if this person capable of producing a 10-to1 return for him/her based on the idea.  Period.   This means, can they build a business around the product?  Can they displace incumbent solutions?  Can they sell?  Are they capable of properly supporting early customers?  Can they scale a company?  Do they even understand what metrics will drive company valuation?  The investment decision is based on whether you can build a great company around you great idea.

Here are a few things investors know to be true.

  • Good ideas are a dime a dozen.  Good companies are hard to find.  (Investors primarily invest in the jockey, not the horse.)
  • Building a company is 100x harder than building a product (yet entrepreneurs focus on the product only)
  • B2B products do not sell themselves
  • It is really, really difficult to displace an entrenched solution.  Really!!!
  • If you are a disruptive technology or product, how do you expect people to find you using inbound marketing?
  • Getting leads and contacts to sell to is really, really cumbersome and hard.  Again, really!!!
  • Everyone loves your product until they have to pay for it.
  • It is simple arithmetic.  If I put in $x and get y% of the company, at what price or valuation ($Z) does the company need to sell so that I get 10x back?  And is the company capable of achieving metrics that will achieve $Z.  Is this believable, achievable and defensible?

Enhance your mindset from that of a common entrepreneur (looking for money) to that of an investor (how are you going to make the investor money) so that you can better relate to your potential investors when seeking money.

For more information on help with fundraising, please contact Arbor Dakota. We are dedicated to helping CEOs grow their great ideas into great companies.