What Are VCs Really Trying to Say? Here Are 3 Common Conversations Translated For You.
This article is included in Entrepreneur Voices on Elevator Pitches, a new book containing insights from both sides of the board room to help you craft the perfect pitch. Buy it online from Amazon | Barnes & Noble | Apple Books | IndieBound
A good friend stayed with me and my family last week, and as she shared about her trials and tribulations in raising angel and venture investment for her exciting new payment platform, I heard some familiar frustrations from the days when I was raising money. As we spent the weekend working through these common conversations, we determined that there are three conversations that investors often have with startups that may need some further explanation.
If you are raising money for your new venture, use this decoder to understand what your investors are actually telling you:
1. “We have concerns about you quitting your full-time job to run this business.”
We all know that you must make money to support your new venture and that you can’t afford to quit your job until you have raised money for the new gig. But, investors are notorious for voicing concerns about your ability to quit your day job.
Beware: Unless you bring on another CEO or expand your management team, it won’t matter if you quit.
Oftentimes, when investors voice this objection strongly or repeatedly, even after you have confirmed your 100 percent commitment to quitting upon your raise, they instead are concerned as to whether you have the right skills to run your new venture at all. Therefore, if you quit your job, they fear that this alone wouldn’t be enough to make you successful.
Tip: Cut to the quick of their concern, and ask them instead to elaborate on the skillsets they think you will need to be successful. Be honest about the skills you have and express your plan for bringing in the talent to fulfill the others.
2. “We need more due diligence than your other investors.”
If you have already found a lead investor, or two or three, you might be surprised to hear that the next investor is subjecting you to more onerous due diligence and wants significantly more information or time from you than anyone else who has actually written a check. While it is true that each investor has her own set of diligence requirements, it is not common for diligence to vary greatly from investor to investor.
Beware: This is a sign that the investor is not likely to invest in your company.
Why? Either she doesn’t respect your initial investors enough to rely upon their diligence, she has major reservations about your concept or she is not comfortable making investments of the size or in the industry where you have made a request. For any of these reasons, however, she is likely wasting your time.
Tip: Ask them for the full diligence list and typical timeline at the beginning of the process. If you notice significant deviations thereafter, you can decide whether to jump through the hoops or not.
3. “Come back after you hit this specific milestone.”
The most common response in the book is a request to revisit the investor once you’ve crossed a specific hurdle -- perhaps after you have found a lead investor or hit a specific revenue goal or reached a certain number of visitors or users. What I find so frustrating about this response is that it is nearly impossible to hit that goal without an investment, causing a vicious and painful fundraising cycle.
Beware: The investor has some serious concerns about the viability of your concept.
Investors hate to be the first in on any idea. If they are unfamiliar with your space or haven’t seen your concept tested by others, they will be extremely hesitant to be the first mover or first money in. However, they would hate to tell you “no” only to find out months later that they missed out on the next Facebook. So instead, they hedge. They tell you to keep them involved at every stage of your company’s development so they can get more comfortable with your concept and to see if they can depend upon another investor’s buy-in.
Tip: Ask for as specific a milestone as possible from all investors, and when you hit that milestone, remind them that this was what they needed to make the investment. Use your momentum to move them to a decision, and do engage them at every step of your success.
Angels and venture investors are taking a gamble by investing in your company. There is significant risk inherent in your business, and they are making decisions about large sums of money, whether it is their own or someone else’s. Understanding and respecting this can make the process much less painful.