“Do you think investors are stupid?”
You would not believe how many times I have posed this question to my clients. And every time they talk about approaching investors with “quick wins” and meaningless metrics, I am forced to ask them again.
“Do you think investors are stupid?”
No, they’re not (not even dumb money). The investors you’re approaching have likely grown one or more of their own companies to stratospheric success. They have hundreds of in-depth conversations with entrepreneurs every year. They’re as thoughtful with how they deploy their capital as you are with your startup’s cash reserves. Frankly, probably significantly moreso.
Hell, I suck as an investor. My investments often look more like philanthropy than revenue-generation. And even I ask questions. If you’re thinking, “As long as they don’t ask questions about these stats, I’ll be fine,” then you’re probably fucked.
To be fair, my clients generally respond to this question correctly, if slightly sullen, and then some kicking of rock takes place. They don’t believe investors are stupid. But they do hope that somehow they can use sleight of hand to make their current situation seem more attractive.
“Hey, check out our killer wait list (which keeps growing because we can’t figure out how to launch our product)!”
Or
“Our registration numbers are crushing it (but no one is actually installing our software)!”
Or
“We did $300k of revenue last year (all of which was consulting that we billed through the company)!”
Put simply, the numbers you’re hoping will excite investment are the first numbers an investor will ask questions about. That’s logical, right? Eventually, the truth comes out. And the longer it takes to happen, the worse the response when it does.
There are companies out there that have shown that sometimes, investors can be temporarily stupid. Let’s take Theranos for example. Investors were so excited about Elizabeth Holmes’ idea, and everyone so wanted her to win, they gave her leeway for a while. While I don’t know her, I suspect that Holmes bought into her own bullshit and believed she would eventually figure it out. But she was desperate, and went down a dangerous road. The farther down that road you go, the more likely you end up in an orange jump suit. Because eventually, someone is not stupid. And that’s when it all falls apart — fast.
Same with companies like WeWork. Yes, we all thought the valuation was insane. But keep in mind that the last money in is usually the first money out. So when a Saudi Prince invests a billion dollars for three percent of a company, keep in mind he’s generally protected. He’s got a guaranteed multiple, so even if the company craters, he’ll probably get his money back, plus some. I mean, everyone else is screwed, but that’s not the current investor’s problem. Not. Stupid.
Now that we’ve established investors aren’t stupid, we can discuss what the very smart people you’re trying to raise capital from are looking for from you. Two things will close the deal:
- Traction. Straight up, nothing beats traction when raising capital. It forgives just about everything else — lack of team experience, crufty code and even questionable unit economics (for a while). None of that matters when more and more people are using your product (and, even better, paying for it).
- A team they believe in.
Number two is obviously a bit more tricky than the first. And if you’ve waited until the last minute to contact investors with poor fundamentals, good luck to you. I look forward to working with you again on your next company.
But if you’ve been talking to investors for months, building trust and rapport, you’re at a point where you can have no-bullshit conversations with them about where you’re at as a company.
For a certain amount of time, you have the ability to tilt at windmills. And if you’ve been doing the things that you’ve said you were going to do, a few investors may believe you when you discuss your failures, explain how you won’t fall into the same traps again (while your competition still might), and show them how you’ve fixed problems and streamlined your business so that your next capital raise will last longer.
The fact that you’ve had 1,000 failures won’t mean you’ll be successful the 1,001st time, but if you’ve learned a ton, that’s your secret sauce. To quote Thomas Edison, “I have not failed. I’ve just found 10,000 ways that won’t work.” You’re now way smarter than new competition. And if you haven’t figured out something that no one else knows, then you might want to question what you’ve been doing and if it’s time to work on something else.
What you should absolutely not attempt to do is treat investors like they are stupid. Because if you’re treating investors like they’re stupid, you’re giving yourself license to ignore the shit that really matters. We know what happens when you ignore the real problems…
Lying to investors is just lying to yourself. If you can’t raise capital with the truth, just don’t raise capital.
— Eric Marcoullier
This is one of those articles that’s pretty much grokable by title alone — don’t try to bullshit investors because they have a ton of practice sniffing it out. Sure, there are outlier cases, but the world is a bell curve, my friend, and you are squarely in the middle.
So if founders already understand this, why do they keep trying to pull fast ones on investors? Because founders often don’t have someone calling them on their shit and helping them to build a company the right way. If you don’t do the right work in the right order, you’re stuck in the end with short cuts and Hail Maries. If you’d like to talk about the right order of things, send me a note at eric@marcoullier.com or hit my consulting site at marcoullier.com.
(Photo by Flavio Gasperini on Unsplash)