Founder Says: Investor Hears

Founding a startup takes grit, determination, and resilience. Founders work to build their company day after day after day. They know everything there is to know about their market and work hard to articulate the opportunity to investors when seeking capital to fuel their company’s growth. But sometimes, the way a founder describes their efforts and traction throughout the fundraising process doesn’t quite reach an investor’s ears with the intended meaning. A well-meaning founder may actually begin talking an investor out of making an investment because of misunderstandings in communication.

Let’s explore three common phrases often used by founders during investor pitch meetings that don’t always deliver the desired meaning in the mind of the investor.

Founder Says: We've accomplished all of our traction to date without spending any money on marketing.

Investor Hears: We haven't even begun to test paid channels yet so we'll be learning from scratch about paid marketing using your investment dollars.

In this instance, the founder wants to communicate that there has been strong enough initial reactions from customers and word of mouth that they haven't needed to move to paid channels yet. But the way it comes across most often is that the marketing piece of the startup hasn't been de-risked yet. Expensive mistakes will be made in this area as a founder learns what works and what doesn't in paid channels. Perhaps the word of mouth will be so strong that the startup won't need paid marketing for a long time, but eventually it will be needed so it's up to the investor in this instance to decide if the risk is worth it or not.

Founder Says: We don’t have revenue because we’re working on our technology, so I haven’t been trying to sell yet.

Investor Hears: I like working on the technology more than I like selling.

In this example the founder is wanting to communicate that they are at the earliest stages of building their company and they want the investor to focus on the big opportunity the founder sees. But what investors know is this: revenue is a good thing in a startup. Always. When a founder can show there is revenue coming in, they’re proving that someone in the market is willing to pay for the solution. This is an important sign for an investor to see. Founders who can show revenue are more likely to secure investment and also command higher valuations. But early stage startup founders often say they “haven’t turned on sales yet,” or “haven’t been trying to sell yet” and it can be a red flag to investors.

The question in the mind of the investor sounds like “is this startup building something the market wants?” In the earliest days of a company the strongest signal of market potential is when customers will pay for a solution, even when the solution isn’t perfectly built or full of features yet. If a founder comes across as being nervous to sell or really excited about the process of building instead of the process of selling, conversations with investors won’t go as planned.

What if a startup doesn’t have revenue? Can they still raise capital? The answer is yes but founders who are able to raise capital without revenue are proving that their solution is desired by the market in other ways. This may include having a signed letter of intent (LOI) from a potential customer to show the product will be purchased when it’s ready. However, it should be noted, that getting to an LOI with a potential customer involves sales. Founders are typically expected to sell in one way or another.

Founder Says: We have an amazing group of advisors. (while showing an “advisor” slide in their pitch deck)

Investor Hears: I’ve been successful at getting these amazing people to let me list them on my advisor slide (probably by giving them equity) but they’re not interested enough to invest in the company.

In this scenario, the founder is wanting to communicate that there are fantastic people involved with the startup. These could be celebrities, well known entrepreneurs, or top level executives from household-name companies. But listing these “advisors” is a two-edged sword. On one hand it can be a good thing as it signals a founder has a powerful network. But on the other hand, if these powerful people are not investing in the company the investor will wonder why. Do the advisors not believe in the company enough to invest their own money? Are they getting equity in exchange for being listed in the pitch deck? How deeply involved are the advisors? That’s a lot of questions to come up about something ancillary to the startup’s actual product or value. Founders should not want the conversation with a potential investor to veer down a path that could lead to the advisor slide hurting the startup instead of helping it.

This is a controversial stance and not all investors think of it the same way, but I’ve personally seen the advisor slide go wrong more times than I’ve seen it help build a founder’s case that the company is worth investment. Founders, if you decide to highlight advisors, make sure you are ready to answer questions about the advisors’ roles and whether or not they are personally invested.

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In each of the three examples above, the founder was genuinely trying to communicate something good about their business, but in fact, ended up communicating a negative in the mind of the investor. Understanding the point of view of the investor can turn the communication from deal-breaker to deal-maker.

Bonus Example

So far we’ve focused on things founders say to investors, but let’s turn the tables and look at an example where the investor is the one communicating to a founder.

Investor Says: I’m really impressed by what you’re building.

Founder Hears: This investor is about to send me a term sheet!

Founders are continually looking for hopeful signals and when an investor says anything positive, founders often jump to conclusions that an investment is surely coming. Investors have an enormous amount of respect for the challenges of being a founder. In fact, investors need to raise money for their fund in much the same way a founder has to raise. So investors know first-hand how difficult the fundraising journey is and are generally complimentary of founders for persevering through the process, whether or not the investor is interested in writing a check.

Founders, when an investor says something nice about you or your company, accept the compliment and don’t read into it. A statement of support is not a declaration of intent to invest. Trust me, when an investor is excited to invest you will receive more than just some kind words, you’ll get a term sheet or request for due diligence documents to move the process along. 

This article was originally published on Beta.MN, now part of TCB.