Investors Passing on Your Pitch? Here's What Is Really Happening on Their Side of the Table.
Mitigate investors' fear-of-missing-out on the coolest new startup by speaking the right language.
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Investor FOMO (i.e., "fear of missing out") became my digital retail startup's biggest hurdle in securing a check.
To deal with said fear, you first need to realize there's more to it than just bandwagon jumping for investors. This grass-is-always-greener mentality is underpinned by three other concerns that, with some planning, can be largely addressed.
Due diligence requires resources
Investors, particularly angels and boutique funds, don't have the resources for extensive due diligence. While large funds have teams of associates to vet everything from your financial model to the validity of your unit economics, small investors would prefer to skip the headache. If another investor vets the deal, the time saved can drastically reduce the cost of participation.
Bringing an industry veteran onto your team can help assure investors that other relevant people have already "diligenced" your startup. Retired executives are often willing to consider opportunities to pay their knowledge forward. Offer them equity in exchange for a small commitment of their time. The former CEO of a Fortune 500 company isn't going to be your new marketing director, but he might be willing to advise you and lend credibility to your brand.
Generalist investors don't know your niche
If a 3-person fund or angel investor has stakes in food, consumer tech, fashion and Software As A Service, in all likelihood they are relying on outside expertise to learn about each industry. When you pitch your concept in a niche they don't have a history in, they won't automatically know whether your concept is truly new, necessary and scalable. Relying on the judgement of other investors who are already savvy on the dynamics of your industry is helpful.
To navigate this hurdle, illustrate the parallels between your company's roadmap and the trajectory of businesses in industries they know. If you are starting a restaurant, but they've previously invested in consumer tech, show how the growth process hits the same milestones, like reaching early adopters and then scaling to critical mass. When your target investor isn't deeply immersed in your industry, then research theirs and show them why this is not a stretch.
Small investors don't want to be on the hook if things go south
Risk mitigation is a serious driver of FOMO-style investing. A big investor who is already committed to a round offers a safety net for smaller parties who are concerned that if you need an extra million to reach your next major milestone? They can't afford to be on the hook for it. Venture capitalists have shared with me that this is their single biggest concern when going into an investment first or going in alone.
Anticipate this by showing that you've thought through all possible scenarios between now and your next fundraising milestone while planning for the contingencies. Show your math and ask for enough money upfront to cover them. While too large an ask can raise concerns that an entrepreneur is not realistic, going too small can call into question whether you've thought through what this is really going to take.
Even armed with these strategies, FOMO is a difficult force to overcome when you're looking for your first investor. Real risk-takers are out there, but they're in the minority—even among "early-stage" funds. But the right investor will appreciate your plan to navigate risk and your understanding of how the game looks from their perspective.