I hope you found the recent foray into the mind of Elon Musk to be valuable to you in developing your company’s senior team. I can’t emphasize enough how important team composition is to your future growth — not to mention specifically for gaining investor capital.
Today, I want to return to our Master Funding Equation series. Check out this short video with the key takeaways.
Over the past several weeks we have worked our way through the formula. Now, we’re at the last key element: Understanding the mind of investors. Before diving into that, let me provide you with the Master Funding Equation (MFE):
- A Viral Vision Statement/Elevator Pitch X
- A Powerful Pitch Method X
- The Correct Pitch Content X
- A Winning Business Strategy X
- A Trustworthy CEO X
- A Balanced Team X
- Understanding the Mind of the Investor
I haven’t previously discussed this, but the MFE contrasts with classic funding formulas (CFF) such as: Problem X Product X Timing.
In the CFF, all factors are those which you have little control over when you begin raising capital. The problem you’ve identified could change or it could be solved by a competitor. The product market could change, pricing assumptions could be erroneous, the features and benefits of your product may not match consumer preferences or expectations. Timing is difficult to predict — both time to market for your product or service, as well as the best timing for your product launch. All in all, these classic funding formulas are full of uncertainty, with most factors being only partially (if that) within your control.
In the MFF, you have a lot of control over all items. An exceptional winning business strategy can compensate for an unexceptional score in the CFF. In Netflix’s defeat of Blockbuster, for example, it was the strategy that mattered, not the problem, product or timing. There are many examples of average products, solving non-compelling problems that came on the market late, yet still triumphed.
So we focus on the factors you CAN control.
Understanding the mind of the investor is no exception. Think of this as the famous “Vulcan Mindmeld”. This is something you can have total control over, yet is difficult because the investor’s mind is opaque to all but other investors. You’ll almost never know the reasons for unreturned phone calls, outright rejection, or repeated delays. If you do get an explanation, chances are it’s perfunctory or vague. So how do you understand the mind of investors, and more important, use that knowledge to your advantage?
This is a major focus in the Entrepreneur’$ Bootcamp program that Intelliversity operates in a joint venture with its creator George Kenney of Shepherd Ventures. George interviewed 92 venture capitalists, asking in confidence what thoughts occupy their minds when listening to pitches. This is now available in Boot Camp as the “Deal Scrubber” — effectively an expert system. This is supplemented by Intelliversity’s interviews of 30 high-net-worth investors and their answers to similar questions. Through Boot Camp, you get an insider knowledge of what is going on in the minds of investors. This insider knowledge allows you to anticipate and pre-empt their questions, even if they do not ask the questions explicitly. You’ll get to take this information home with you as you complete Boot Camp and there’s no other way to get it.
What specific issues occupy the mind of an investor when listening to your pitch?
Here are the most prominent:
- Can I trust this leader to handle the pivots that are inevitable in the scaling of any innovative company?
- Can I trust this leader to be simultaneously coachable and confident as needed?
- Can I trust this leader to listen to me but also think for him/herself?
- Can I trust this leader to be both innovative and stable, as needed?
- Can I trust this leader to be able to think creatively yet live in reality, not fantasy?
- Can I trust this leader to tell me the truth, early and often?
- Can I trust this leader not to squander funds provided?
- Can I trust this leader to hire the right people and to delegate most of the work to them?
Notice a pattern?
As the Japanese are known to remind us: “Trust before Business.” Investors follow this rule almost without fail, even if unconsciously. So when making your first pitch, almost every word and gesture must be designed to elicit trust, not impress or sell the listener on your brilliance or great idea.
The more you sell the company and product (rather than selling trust in yourself) during the first pitch, the more you sound like a used-car salesman or politician, and so the lower your odds of getting a second meeting. In the first meeting, your every word and gesture is about establishing, then growing trust.
Readers of this blog know that I’ve written extensively on establishing, then deepening investor trust. I encourage you to review these posts. Pay particular attention to how listening gets you trusted, then heard, why not having the slick answer to the tough question can build trust, how being coachable deepens trust and how making and keeping promises deepens investor trust.
I’ve also taught you a process for pre-empting the fear-based thoughts of investors during your pitch or first meeting. When trust is waning, learn to apply this process to get your pitch or meeting back on track. One way to do this is with a story about yourself, with you as the hero, who delivered a result. Remember, it does not HAVE to be directly related to your current role or current company. It does need to cast you in the light of someone who can manage a crisis, then produce a good end result. You can also minimize the chance that investors will stop listening. Follow the approach outlined here to use a powerful tool called the CPR (Context, Purpose, Results) for your pitch to maximize your chances of establishing and deepening trust starting with your elevator pitch.
If you elicit a high degree of trust on all matters, you will be able to maintain the high end of your desired valuation range, since you have removed much of the risk for this investor. So, if you take one thing away from this post it is this: investors do not trust you at first. That’s their mindset until you manage to establish, then deepen trust. They know that your goal is getting capital at the best valuation possible. You need to know that their goal is to NOT get fleeced. Only after that do they consider other motives such as to make a good profit.
Other common major issues that occupy investors’ minds include:
- Am I bored or excited?
- Am I familiar with this market and technology?
- Does this company make a real difference in the world, or is it just a band-aid?
- Can I provide coaching and other added value? Will this team listen to me?
- Is the valuation range suggested by the company reasonable?
- With the amount of money invested, will I have enough control?
- Will this CEO be willing to work toward selling the company (or an IPO)?
- If not, is the company open to a royalty (revenue share) arrangement?
- How sustainable is the advantage currently owned by this company?
- If I invest in this company, will it embarrass me? (a subtle trust issue)
- Does investing in this company violate our internal rules regarding risk, sector, etc?
- Do the potential returns of this company justify the amount of risk we’re taking?
- Can I explain this company to other investors and my partners easily?
- Are we over-allocated in this sector?
- Does this CEO remind me of other CEOs who have made money for me?
- Does the CEO have significant skin in the game (money of his own invested)?
- Does the CEO see the need for an Execution-Master on the executive team?
- Does the CEO’s spouse back his/her being an entrepreneur and all the sacrifices that it entails?
- Does the CEO understand the details of the company’s finances?
- Does the CEO appreciate the competitive landscape, realistically?
- Does the CEO really understand the intended customer, including the process by which they will buy the product?
- Is there a realistic and detailed go-to-market plan?
There are many others, though these we have found most often. We’ll cover many of these issues in coming blogs, but notice how many of these investor questions relate to key elements of the MFE? In particular, note that 1, 4, 10, 13, 15, 17 and 21 all relate to key aspects of the MFE.
Next week we will review the entire Master Funding Equation to distill the key elements of each part of the equation.
Key Takeaways:
- Learn the common thoughts that investors have while you are pitching
- Learn how to pre-empt all these thoughts
- Most of your first pitch should be spent on pre-emption
- Pay special attention to the investor’s thought: can I trust this person?
- Never stop paying attention to trust