The purpose of this article is to outline the various types of messages and information a startup may communicate with potential investors.

You may download a PDF of this article from: How does a startup communicate with potential investors V2

 Communications with potential investors is based on the information pyramid.

The information pyramid outlines the varying types and quantities of information the startup communicates to potential investors.  The top of the pyramid has limited information, with each succeeding layer having more.  A startup has a plan and process for managing this information pyramid with potential investors. The approach varies depending upon the stage of the startup e.g., a founder dealing with friends and family is different from a billion-dollar IPO.

The information pyramid has eight layers:

Layer 1: The one sentence pitch

“My company (company name) Is developing (a defined offering) to help (a target audience) (solve a problem) (with secret sauce).”

The one sentence pitch is further described in this link to the Founder Institute:

https://fi.co/madlibs

Layer 2: The elevator pitch

This 20-30 second summary will enable investors to decide whether to learn more about the CEO and the startup.  The investor decision is based on:

• The key words include: the CEO’s name, company, solution, target customer, the problem/need being solved, and suggested next steps.
• How the CEO speaks e.g., does the founder immediately start a one-way broadcast vs first learning about the investor, tone of voice, body language, etc.?

If the investor doesn’t like the founder, chances are there are no next steps.

Layer 3: The pitch deck which supports an oral presentation

This pitch deck is designed to support the oral presentation by CEO to investors. There are lots of graphics and images, with limited detailed information.  This deck is not designed to be read as a standalone document.

Layer 4: The executive summary

The executive summary is a 1-2 page document designed to be read as a standalone document.  This summary contains a broad range of information including: the target customer; customer segments; the customer problem; the solution; business model; sales & marketing strategy; competitors; competitive advantage; financials, etc.

The CEO must clearly, simply, and briefly communicate the most critical points, which will result in an investor wanting to meet and learn more.

MaRS has a document which outlines the creation of an executive summary:

https://learn.marsdd.com/wp-content/uploads/2010/12/The-Business-Plan-Executive-Summary-WorkbookGuide.pdf

The Gust website provides a structure for creating an executive summary.  Gust is an information sharing platform which connects accelerators and angel investor groups with startups. The website also has an automated tool to analyze the executive summary.  .

www.gust.com

Layer 5: The Oral presentation and standalone pitch deck

The oral presentation conveys far more information than the Layer 2 pitch deck. The CEO also has the challenge of building relationships with the investors. During the Layer 4 presentation potential investors are considering: how the founder communicates, their confidence, how questions are answered, etc.  Investors are thinking things such as: Do I want to work with the CEO? Do I trust the CEO?  Does the CEO have a deep understanding of the customers, their problems, and the startup’s solution?

U.S. research shows that investors will spend an average of 3 minutes and 44 seconds reading a pitch deck that has been sent to them.  The deck should be between 10 and 20 pages.  The startup CEO has only a few minutes of reading time to generate interest so that the investor wants to have a meeting to learn more.

Layer 6: The Business model canvas

The business model canvas is the story of who your customer is, why they buy from you, and how you make a profit. The canvas consists of both narrative text and numbers, with assumptions and facts.  On day 1, the canvas may be entirely assumptions – the canvas evolves rapidly as the startup validates or invalidates assumptions.  One page may be enough for the canvas.

The canvas has nine components:

Customer segments; customer value proposition; customer relationships; channels; key partners; key resources; key activities; cost structure; and revenue streams.

Further information on the business model canvas is available at:

https://koorandassociates.org/tools/what-is-a-business-model/

Layer 7: The business plan

The business plan includes details on how the company will be built. A critical part, from day 1, is the monthly 24-month cash flow forecast, with key milestones.  The value of the forecast is ensuring that the startup does not run out of cash.  Many startups underestimate both when revenues appear, and when investors provide capital.

The business plan outlines how the business model canvas will be created, and where the limited resources will be deployed.  The CEO must decide which are must-dos vs nice-to-dos, and what is good enough.

MaRS has a template for a business plan:

https://learn.marsdd.com/article/are-business-plans-for-raising-money/

Layer 8: The data room

The data room contains the documents required by investors for their due diligence. The National Angel Capital Organization has an example of the contents of an online data room:

https://www.nacocanada.com/cpages/common-docs

A later stage startup will require more information in the data room.

Monthly communications with potential investors

The primary focus of many investors is customers and customer engagement.  The question in the investors’ minds is: are there a large number of potential customers that would need to buy a solution.  If there aren’t customers with a problem they are willing to pay solve, there is no viable startup.

The purpose of monthly communications with potential investors is to generate interest so that the investor wants to meet again.  A startup with an ever-growing set of customers generates this interest.  The monthly communications do not and must not answer every possible investor question.  Investors will be getting many of these communications and have limited time.  They may well be reading the update on their phone.

The monthly update has historical customer engagement growth, the milestone(s) achieved in the past month and the milestone(s) for the next month.  This enables investors to determine if you accomplish what you say you will accomplish.  An investor red flag is a CEO not achieving what the CEO said they would in the next month.

Customer engagement at the pre-revenue stage may include:

• The number of potential customer interviews (these are not sales calls). An investor red flag is not interviewing customers to validate that they have a problem they are willing to pay to solve, and that there are a large number of these customers.
• Potential customer survey results.
• Website metrics such as number of people reading specific content.
• Number of potential customers following your blog, signed up for your newsletter, etc.
• Letters-of-intent from potential customers.
• Numbers of potential customers and users in your pilots.

At the revenue stage with a minimum viable product, the key metrics include:

• The number of cash paying customers.
• Customer churn.
• Customer retention.
• Net promoter score. An investor red flag is if the current customers would not recommend the company.  One investor said they look for startups where the customers are “foaming at the mouth” in enthusiasm for the startup.

This monthly communications to potential investors contains a small subset of the information going out to existing investors.  Send these emails the same day and time each month.

Potential investors have other ways to learn about your startup

The communications the startup is doing with other startup ecosystem members may also end up with potential investors.  These types of communications include: advisor and advisory board updates, board of directors updates, customer and supplier updates, employee updates, website updates, press releases, presentations at seminars and conferences, updates on social media, etc.

The startup ecosystem members may be doing their own communications.  For example, employees posting comments on Glassdoor.

 Your next steps

• From day 1, start to organize your information in the pyramid.
• The information and messages will be in different layers of your pyramid. Determine how you will keep your information and messages in sync.
• You will be communicating with different members of your ecosystem. Determine how you will keep your information and messages in sync.
• To minimize work and minimize confusion in your ecosystem, seek to re-use information and messages rather than creating content from scratch.

Further reading

“Finding new investors” https://koorandassociates.org/points-of-view/selling-a-company-or-raising-capital/finding-new-investors/

The purpose of this article is to outline how a startup can find new investors.

You can download a PDF of this article from: Finding new investors

Building relationships with potential investors is the foundation for raising funds.

What is the source of VC’s (Venture Capitalists) closed deals?¹

• 12% of closed deals resulted from a startup making an application.
• 65% came from referrals and the VC’s professional network.
• 23% are proactively self-generated by the VC.

Warm introductions to VCs are the most likely way to result in a closed deal.  A warm introduction comes from someone the VC knows and whose recommendation the VC trusts.

Building a trusted relationship takes time

Investors give money to those they trust.  It takes time for the startup founders to build that trusted relationship.  The founders need to contact investors before they need money is needed, update the potential investors each month, be honest and transparent, and achieve the short-term milestones they said they would achieve.

You will have to contact and meet a large number of potential investors

The statistics for an average seed round raise in a U.S. study were²:

• 58 investors contacted
• 40 meetings with investors
• $1.3 million raised
• 5 weeks to close.
• The average pitch deck was 19.2 pages
• The average time an investor spent to read the pitch deck was 3 minutes and 44 seconds.

There are six ways to connect with potential investors

#1 Introductions from your lead investor

Your lead investor has the reputation of investing in good startups and also knows a number of other startup investors.  Your lead investor will make the effort to draw in other investors.

#2 Warm introductions from someone the investor knows and whose recommendation the investor trusts

The following email template is what you send to the person doing your warm introduction. The only work they need to do is forward your email

A sentence regarding catching up/meeting/talking with your contact.

 One sentence bio regarding a big achievement in your career relevant to your startup.

 Three sentence paragraph about your startup.  Your one sentence pitch.  Customer traction growth plus a milestone or two.  What you’re seeking e.g. seed stage investor.

 One sentence thanking your contact for their introduction to XYZ.

 A paragraph regarding XYZ showing what you’ve learned about them and why they might be interested in your startup.  Ideally you could provide some value to the investor e.g. knowledge or someone they’d value connecting with. This could take a couple of hours of research.

#3 Presenting at pitch competitions and other events with investors

This can include events such as: demo day at your accelerators, a booth at Collision.  Identify potential investors who are interested in you.  Suggest a follow up call or meeting.  Get their contact information and follow-up within 24 hours.

#4 Attending events where investors attend

You and the investors are all part of the audience.  Events can include: pitch competitions, conferences, etc. For you, this is a non-pitching situation.  Let’s assume there are a large number of investors present and you’d like to meet as many as possible.  Carefully plan out your three-minute meetings.  The objective or each meeting is to create a relationship, not to make a pitch.  The different stages of the three minutes are:

• Initial introduction: smile, be enthusiastic, and be 100% focused on the investor.
• Learn about the investor: be curious and ask questions such as; why they are at the event. Do not pitch.  It would be great if you’re able to provide some value to the investor e.g. knowledge or someone you can introduce them to.
• Wait for them to ask about you. Then share your one sentence pitch followed by one sentence regarding customer traction, major milestone achieved and what you’re seeking e.g. a seed investor.
• See how they respond. If they are interested and ask more questions about your startup, you have a prospective investor.  If they are not interested, and do not ask questions about your startup, do not pitch your startup.
• Meeting conclusion: For prospective investors, you’ll need to judge the appropriate request for next step. Your options are: are meeting, a call (Zoom, Skype, or phone) or an email.  Get the prospective investors business card with contact information, or connect on LinkedIn immediately.  You will be doing no follow-up with non-prospective investors.

Within 24 hours of the meeting, follow-up with the prospective investors.

#5 Scheduled meetings with investors at events

Conferences and other events often enable startups to schedule meetings with investors.

#6 Cold call emails.

The goal of a cold call email is to generate sufficient interest to get a reply back and begin an email conversation.  This is the beginning of a trusted relationship. The goals are not to set up a meeting, get a check, etc.  The cold call email do’s and don’t include:

The cold call email must be short enough to be read within 60 seconds.  An email which takes two or more minutes to read will be deleted by the potential investor because she simply does not have time to read the large number of emails coming in.  The potential investor must be able to read the email, think about it and reply within 2 minutes.

The template for the cold call mail is:

• Write a subject line than generates interest. If your subject line, does not generate interest, your email may be deleted. The investor often will read your email on her phone. The first 30-40 characters of the subject line are key and you only have about 90-100 characters to generate interest. The two most important things in the subject line are: customer traction and your ask e.g., “$1 million ARR, seeking seed VC”.
• The first paragraph describes the problem being solved.
• Next a paragraph with bullets of key metrics e.g. customer traction growth, revenue growth, key milestones achieved.
• Next a paragraph of what the company does.
• Then a paragraph showing what you’ve learned about the investor and why they might be interested in your startup. Ideally you could provide some value to the investor e.g. knowledge or someone they’d value connecting with. This could take a couple of hours of research.
• Concluding with an ask for call or meeting.
• Attached the pdf of your pitch deck. Do not have a link to your pitch deck.

Some do’s and don’t to consider for your email are:

• Build a list of potential investors and research them. Do not contact investors who would not be interested in your type of startup e.g., the investor only funds U.S. headquarters companies and your headquarters is in Canada. Research the potential investor to understand what they want. What have they said about their investment targets: industries, geographies, technology, stage of company, types of founders, valuation, etc. How much money do they typically invest? Are they a lead investor or do they require a lead investor?
• The email must state: the problem, the solution, customer traction, if you have revenue paying customers and what the customer growth has been, market size, who the co-founders are, and the unique insight or special sauce the startup has.
• The email must not contain: The story about how the company came about because the history does not determine whether or not the investor is interested.
• The email must not contain the CEOs biography.
• Do not use industry specific jargon or acronyms because the person reading the email may not be an industry
• The email must come from the company’s email with the person’s name e.g., jane.doe@website.com
• Don’t send a follow-up within a month. The investor has made the decision on whether or not to reply.  When doing a follow-up, there should be some new information, especially regarding customer growth.
• Attaching a standalone pitch deck is optional. Your research of the investor can indicate what they want included in a cold call email. Do not have a link to your pitch deck – make it easy for the investor to look at the pitch deck on their phone.
• Email must contain facts, not vague claims.
• Use a CRM to send the email so that you can track whether or not the email has been opened. Do not do a mass emailing.  You’ll also need the CRM to manage the large amount of information you’ll be collecting about a pool of potential investors.

Your next steps

• Define your fundraising plan. You need to start building investor relationships before you need money.  The plan should include time and funds to travel outside of the Toronto area.
• Implement a CRM to manage your investor relationships and related investor information.
• Research investors to build a list of potential investors. Resources to find potential investors include: your existing network, LinkedIn, AngelList, Crunchbase, Gust, Hockeystick, Startup HERE Toronto funding database, and VCWiz.

 Footnotes

¹ Paul Compers, Harvard Business School, Will Gornall, University of British Columbia Saunder School of Business, Steven N. Kaplan, University of Chicago Booth School of Business, Ilya A. Strebulaev, Graduate School of Business Stanford, “How do venture capitalists make decisions”, April 2017, Page 42  This survey of VC firms included: 63% of all VC US assets under management, 9 of the top 10 VC firms and 38 of the top 50 50 VC firms.

² “What we learned from 200 startups who raised $360 million”, Professor Tom Eisenmann, Harvard Business School, and DocSend

Further reading

“How does a startup communicate with potential investors?” https://koorandassociates.org/points-of-view/selling-a-company-or-raising-capital/how-does-a-startup-communicate-with-potential-investors/

You may download a PDF of this article from: How do venture capitalists create value

The purpose of this article is to help startups and investors in venture capital funds understand what VCs (venture capitalists) do to create value.  VCs are focused on creating financial returns for their investors.  VCs often have other objectives, such as helping women founders, or having social impact.  Many startups apply to VCs.  VCs go through a multi-stage process to filter out startups before making an investment decision.

Very few startups succeed. 

Andreessen Horowitz, a U.S. VC fund with over $10 billion of asset under administration, has public shared their experience¹.  They receive 3,000 startup applications per year. 200 startups are looked at seriously. 20 startups are funded.  Only 8% succeed i.e. 92% failure rate.

What do VCs actually do to achieve their objectives?

The following facts are from a survey of institutional VC firms (i.e. not private equity, angels investors, etc.) which included: 63% of all VC U.S. assets under management, 9 of the top 10 VC firms and 38 of the top 50 VC firms.  The survey results are averages.  A startup or VC fund investor needs to research what each individual VC does.  I have focused on early stage investments. There are different survey results for late stage VC investments.

#01 What is the source of closed deals?

1. 12% of closed deals resulted from a startup making an application
2. 65% came from referrals and the VCs professional network
3. 23% are proactively self-generated by the VC

Startups need to build relationships with the VCs network, in order to enable valuable warm introductions.

Startups also need to build social presence and a network of relationships to enable VCs to find the startup.

#02 What does the median deal funnel look like for a VC firm?

• 250 startups are seriously considered
• 60 result in management meetings
• 20 are reviewed with partners
• 13 undergo due diligence
• 5 are offered a term sheet
• 4 close

1.6% of the seriously considered startups are funded.

#03 What financial metrics are used by VCs to analyze investments?

The average VC uses close to 2 metrics.  The most common metrics are:

• 56% cash on cash multiple
• 26% IRR
• 17% no financial metrics
• 12% NPV
• However, 48% often make gut investment decisions and only 12% quantitively analyze past investments.

Financial metrics are often used, but the investment decision is not driven by financial metrics.  The assessment of the team is the most important factor.

#04 What are the VCs IRR and Cash-on-cash multiple requirements for an individual investment?

• IRR 33%
• Cash-on-cash 7.5

The requirements are high because the few investments that do succeed must cover-off the vast majority of investments that fail.  Part of the VCs’ filtering process is eliminating those startups that do not have the potential for a large number of customers leading to a large amount of revenue.

#05 What exit multiple have the VCs achieved according to the survey?

• The average is 4.2
• 27% of the time it’s less than 1 i.e. lost money
• 12% of the time it’s 10X

To make an overall profit, VC must have these 10X home runs.

#06 What is the most important factor when deciding to invest?

• 53% is the team
• 13% fit with the fund 12% product
• 7% market
• 7% business model

By the time an investment decision is being made, a lot of filtering has already occurred.  Poor products and small markets have already been filtered out. Most VCs focus on the ability of the team to both execute and to make the necessary changes as the team learns more about the market.

#07 What % of VCs believe is the most important factor in the success of their investment?

• 64% the team
• 11% timing i.e. being either too early or too late costs money.
• 7% luck
• 6% technology
• 6% industry
• 4% business model
• 1% market
• 1% misc.
• 0% board of directors. 32% of VCs believe the board of directors is an important factor.

#08 What % of VCs believe is the most important factor in the failure of their investment?

• 60% the team
• 10% industry
• 8% timing
• 7% business model
• 6% technology
• 4% luck
• 3% market
• 2% board of directors

#09 What % of VCs believe is among the most important factors for the team?

• 65% ability
• 59% passion. Passion is a combination of execution and vision.
• 58% industry experience
• 52% teamwork
• 48% Entrepreneurial experience

#10 What does deal closing look like?

• 73 days to close the deal
• 81 hours on due diligence
• 8 references called

Many VCs use consultants to conduct part of the due diligence. Reference calls may be made to: current and lost customers, former employees, suppliers and other partners, other investors etc.

#11 What are the key items VCs demand in their contracts?

• Pro-rata rights
• Liquidation preferences
• Anti-dilution provisions

#12 What % of VCs say their interaction with portfolio companies is in the first 6 months after investment?

• 2% every day
• 28% multiple times a week
• 33% once a week i.e. 63% of VCs interact at least once a week.
• 23% 2-3 times a month
• 13% once month
• 1% less than monthly

A startup needs to be prepared for frequent interactions with their VCs.

#13 What % of VCs take specific actions in portfolio companies?

• 86% strategic guidance
• 81% connect with other investors
• 69% connect with customers
• 65% operational guidance
• 55% hire board members
• 51% hire employees

#14 What benchmarks do VCs think are the most important to LPs (Limited Partners, the investors in the VC fund)?

• 59% Cash-on-cash multiple
• 26% net IRR
• 9% relative to VC funds
• 2% relative to S&P 500

#15 What are the performance results reported in the survey?

• Cash-on-cash 4.0

#16 What do VCs market to their LPs?

• IRR will be 24%
• Cash-on-cash will be 3.8
• 93% of VC say that will they will out-perform the stock market.

Next steps if you are a startup

• Find your lead investor who will have the network to draw in your other investors.
• Target VCs who may be interested in your type of startup.
• Define what your VC requirements are (e.g. ability to introduce to customers) and target those investors
• Stay in touch with potential VC with a brief monthly update.
• Understand what the VC needs from an exit and how your startup meets those exit requirements.
• Do reference checks on your potential VCs.

Next steps if you are an investor in a VC fund

• Define the role the VC investment class within your overall asset allocation and long-term financial plan.
• Define your financial and non-financial requirements for your VC investments.
• Ask your potential VC for the necessary facts. Cash-on-cash results should be from the investor perspective i.e. net of all fees. Understand whether VC IRR results are based on valuations or exist, and if reflect net investor returns.
• Do reference checks on your potential VC.

Footnotes:

¹ https://corporatefinanceinstitute.com/resources/knowledge/other/how-vcs-look-at-startups-and-founders/

² Paul Compers, Harvard Business School, Will Gornall, University of British Columbia Saunder School of Business, Steven N. Kaplan, University of Chicago Booth School of Business, Ilya A. Strebulaev, Graduate School of Business Stanford, “How do venture capitalists make decisions”, April 2017, Page 42  This survey of VC firms included: 63% of all VC US assets under management, 9 of the top 10 VC firms and 38 of the top 50 50 VC firms.

You may download a PDF of this article from: https://koorandassociates.org/wp-content/uploads/2020/02/how-do-venture-capitalists-assess-teams.pdf

The purpose of this document is to help startups understand how VCs (venture capitalists) assess founding teams.  Everyone has their own point of view.  I will share with you some research.

Research shows that the most important factor early-stage VC (venture capitalists) consider when it’s time to make the investment decision is the team.

• 53% of VCs believe the team is the most important factor.¹
• 64%% of VCs believe the team was the most important factor in their startups’ success²
• 60%% of VCs believe the team was the most important factor in their startups’ failure³

An analysis of the personality traits of the founders of 500 startups revealed 4 key traits correlated with success or failure.⁴

• Quick and decisive decision makers were the most negatively correlated with success. The most successful founders were calculated, deliberate, and focused.
• Compassion, consideration, and concern for people were negatively correlated with success. The greatest  degree of negative correlation with success was when the team thought the founders were people focused.   A startup founder needs to make many difficult, unpopular decisions especially those regarding the exit of team members.
• Self awareness is critical. The most successful companies had a very aligned understanding between the founders and the team members regarding each others traits.  The smaller the discrepancy between the founder’s self-awareness and the team’s perception of the founder, the higher the startups performance.  I read research that for large companies, there are huge differences between the CEO and C-suite perception of themselves vs the employee perception of the C-suite.
• Women founded companies performed better than companies with only male founders.

Have a calm demeaner when pitching to VCs.⁵

An analysis of how VCs evaluated pitches revealed that the finalists tended to have a calm demeaner.  Further study showed that VCs equate calmness with leadership strength.

California angel investors’ judgement as to which CEOs should go into due diligence tended to prefer trust over skills.⁵ Technical skill gaps can be addressed via training, hiring, and advisors. Character is hard to change.  The angels sought CEOs who were honest and trustworthy.

California angel investors’ judgement as to which CEOs should go into due diligence preferred CEOs who were open to new ideas from investors regarding ways to increase value⁵.  The angels did not want CEOs who refused to consider new ideas or refused input from the angels.

CEOs should view pitches as an improvisational conversation with investors, listening to questions, and even asking the investors what they think.⁵

 My own observations are:

• Gaining understanding of the points raised above requires meetings in addition to pitches, most likely in the due diligence process. Investors determine if they can work with the founders for several years.
• Many investors seek founders who are able to learn knowledge(e.g. about customer, the marketplace, competition, etc.) and skills (e.g. cash flow forecasting, key business metrics, technical skills)
• Most investors seek founders who demonstrate a deep understanding of the customers’ problems, the benefits, and the competition. I’ve seen too many founders first build a solution and then try to find out if customers actually have the problem and are willing to pay for it.
• Many investors seek founders who have some unique capabilities.
• Many investors seek startups with unique technology or a unique solution which cannot be easily copied by competitors.
• Successful founders tend to be brilliant, able to assimilate and analyze large amounts of information (both quantitative and qualitative) and focus execution on the unique insights they’ve gained.
• Investors, especially angel investors, vary in terms of the potential size of the market and company they are seeking. I’ve seen angels get excited about a company that has the potential to grow to $10 million in revenue per year.  Other angels seek the potential for $1 billion per year future revenue.

Your next steps

You must research each VC to understand how they assess startups.  All VCs are not the same.

 

Footnotes:

¹ Paul Compers, Harvard Business School, Will Gornall, University of British Columbia Saunder School of Business, Steven N. Kaplan, University of Chicago Booth School of Business, Ilya A. Strebulaev, Graduate School of Business Stanford, “How do venture capitalists make decisions”, April 2017, Page 42  This survey of VC firms included: 63% of all VC US assets under management, 9 f the top 10 VC firms and 38 of the top 50 50 VC firms.

²  “How do venture capitalists make decisions”, Page 53

³  “How do venture capitalists make decisions”, Page 54

⁴ Brittney Riley ,”How should investors evaluate founding teams”, Medium posting, April 24^, 2017 This is an analysis of the relationship between company performance and personality traits of 500 startups.

⁵ Lakshmi Balachandra, “How venture capitalists really assess a pitch”,  “Harvard Business Review”, May-June 2017

You may download a PDF of this article from: What is the value and role of a lead investor

How do you read this article?

• This article is written for startup founders.
• There are two examples of a lead investor.
• Then there is a generic description of a lead investor. The lead investor in your specific situation will likely be different.

Two examples of a lead investor:

The lead investor in an angel investor organization

• Produces the due diligence report. Consultants and other angels may have provided input to the report and carried out specific due diligence task.
• Negotiates with the founders on behalf of all the angels.
• Manages angels’ lawyers.
• Manages the angel close including getting the money into escrow.

The lead investor of a syndicate:

• Has prepared a due diligence report, completed a term sheet after negotiations with the founders.
• Then begins to actively recruit more investors to the deal.

What is the value of a lead investor?

• Without a lead investor, you may fail to raise capital.
• The reputation and network of the lead investor will attract other investors.
• Many VCs, angels, and angel groups will not invest until there is a lead investor.
• Including the name of the lead investor and terms in your pitch deck greatly improves your chance of success.
• Having a lead investor reduces the overall time and effort to raise capital.
• The lead investor will make a major investment, at least 15% of the round and sometime up to 50% of the round.

What may the lead investor do?

• Prepare a due diligence report. Subsequent investors may still decide to conduce their own due diligence.
• Negotiate the term sheet.
• Hire a law firm to handle the investors paperwork. Sometimes the startup will pay for some or all of the lead investors out-of-pocket costs.
• Sit on your advisory board.
• Sit on your board of directors.
• Make introductions to potential investors, customers, partners, suppliers, employees, and others.
• Help manage the other investors.
• Help structure future fund raising rounds.
• Participate in future fundraising rounds.

What are the characteristics of a lead investor?

• They passionately believe in you and your startup. They are not going to try to force you out and take control.
• You’ll be able to work with them for the long term. Divorce from a spouse is often easier than divorce from a lead investor.  Do you actually like the lead investor?
• Consider the investor’s values, morals, and ethics.
• They are respected in your industry and/or in the startup financing world.
• It’s helpful if the lead has been a lead before.
• They have invested before and those investments have done well.
• They have lots of funds for follow on investments and investments in other startups.
• They are not in any kind of financial distress.
• The investors have diverse portfolios so that market problems in one sector will not result in pressure on your startup to perform.

Look for the lead investor before you look for the follow-on investors.

• This can take a long time.
• You may make hundreds of phone calls and emails, meet with over a hundred people, and spend over 20 hours a week for three to nine months to find a lead investor.
• You need to build relationships with investors over time. You’ll need a plan, and a CRM, to stay in touch with them.

How do you find a lead investor?

• Build a target list of investors. A CRM is helpful.
• You identify targets from: other founders, advisors, people you meet, researching he lead investors from other deals, lists of conference attendees, The Canadian Venture Capital and Private Equity Association website (cvca.ca) , hockystick website (www.hockeystick.co) startup here Toronto website (https://startupheretoronto.com/startup-support/), the Angel Investors of Ontario website list the Ontario angel groups (https://www.angelinvestorsontario.ca/groups), http://www.crunchbase.com.

Your next steps

• Define what you are looking for in a lead investor.
• Set out you plan to find a lead investor and to stay in contact with the investors you have met.

You can download a PDF of this article from: How do you understand potential investors?

Why understand potential investors?

You will fail to raise capital if you:

• Don’t understand the investors needs.
• Don’t understand how the investors perceives how you meet their needs.
• Don’t understand how the investors perceive that you meet their needs better than others asking for capital.
• Spend time on investors who will never invest with you rather than spending time on investors who have needs you might be able to meet.

Or, as Karen Kelly of K2 Performance Consulting told me, “Don’t try to sell steak to vegetarians.”

The overall process is to:

• Document some hypotheses: What are the characteristics of a potential investor? What are their problems and needs?
• Document your hypotheses in the business model canvas¹. This framework ties together investors, their needs, your solution, and what’s required to build your solution.  Your business model canvas will change as your hypotheses change, are validated, or are invalidated.
• Test the hypotheses by interviewing potential customers. These are not sales calls.
• The interview process will either validate or disprove your hypotheses.
• During the interview process you will likely revise some hypotheses, as well as set down some facts (i.e. validated hypotheses).

Key Hypothesis for the rest of this article:

Let’s assume your target investor is the individual investor who makes decisions regarding some or all of their investable assets.  There would be different needs if your target was: the Chief Investment Officer of family office; the financial advisor who makes investment decisions for clients; or an institution investing capital.

 Why is a business model canvas critical?

Let’s pick a simple example to illustrate:

• You want to raise $10 million and you plan to do $25,000 asks from investor with investable assets of $3 -$5 million. You’ll need have 400 investors.  OR are you planning to do $1,000,000 asks from investors with investable assets of $100,000,000+? You’ll need 10 investors.
• Your channels, partners, resources, activities, etc. will be radically different for each of the above two examples.

A business model canvas will help you think this through.

What are some aspects of the target investor profile?

• Age?
• Gender?
• Location?
• Where born and where living now?
• Current income and occupation?
• Current net worth?
• Part of a high net-worth family?
• Supported by a family office, shared or dedicated to one family?
• % of assets managed (i.e. investment decisions made) by third parties vs made directly by the investor
• Associations membership e.g. Tiger 21 or Family Enterprise Xchange?
• Yearly living expenses – e.g. some potential investors may have fractional jet ownership?
• Future major expenses – this could range from several hundred thousand dollars to support a child in a foreign university, to a $100 million+ for their next yacht?
• Do they have a documented investment thesis?
• Do they have little time to manage their investments, are they devoting significant time to manage their investments?
• What is their asset allocation mix? Specifically, what % of assets are they allocating to the asset class you are part of?  Two examples:  1) You’re a fintech company using AI to analyze home mortgage approvals.  2) You’re an early stage Venture Capital fund investing in companies with women founders.

What are potential investor needs?

Investor needs can include social, emotional, and financial needs.  These needs may include:

• Being perceived by others as: a sophisticated investor, someone making a positive impact on society or a specific cause.
• Having the satisfaction of knowing they are doing good.
• Being actively involved and devoting time to managing their investment. They value the social interaction with other investors.  They value being a coach or mentor to the CEO, being on the advisory board, or being on the board of directors.
• This type of investment is a hobby.
• They are seeking a xx% probability of achieving YY% cash-on-cash return within ZZ years?
• They are seeking wealth transfer to their children and grandchildren.
• IRR is of little interest.

What value will the investor provide to you and your company?

Investors can provide value in many ways.  Some of the hypotheses in your business model canvas may include:

• Providing capital both in the short- and long-term.
• Enabling your capital raising by drawing upon their network of investors.
• Providing access to their network of potential channels, partners, suppliers, customers, and employees.
• Enabling your success based on the reputation of the investor.
• Being a coach or advisor to you.
• Serving on your advisory board or board of directors.

What are the dos and donts?

• Do document and execute a structured process.
• Do define your target investors and select potential investors who are representative. For example, if you are creating a venture capital fund which will focus on providing investor exits within 3 years, do not interview potential investors who seek a 20+ year exit in order to facilitate inter-generational wealth transfer.
• Do face-to-face interviews. Video calls are a distant second best.  Phone calls are a very distant third best.  Don’t do emails or surveys because those do not allow interactive dialogue and understanding.
• Do get out and interview lots of investors. The absolute minimum number of investor interviews is 10.  50 interviews are a better number.  You will have to contact many people to get the necessary interviews because most people will decline.  They are strangers with busy lives.
• Do ask potential investors if it’s OK to record the interview for later analysis. If not, have a second person take detailed notes.  Do not conduct a non-recorded interview by yourself.
• Do document the criteria for assessing the answers. This will avoid confirmation bias, in which you’ll ignore information which invalidates your hypotheses.
• Do not interview friends, family, or those you have a personal connection with. You need brutal honesty, rather than hearing from people who do not want to hurt your feelings.
• Do focus on the people who actually have the problem or need for which you are creating the solution.
• Do create questions which require quantitative answers or specific descriptions. Don’t ask for subjective or hypothetical feedback.
• Do create questions which help you understand how investors think, and why they take the actions they do.
• Do not talk about your company in your initial meeting.
• Do not use or send a survey form. These tend to ask closed-ended questions, while you want open-ended responses to open-ended questions.
• Do finish each interview with two questions: “Who else would you recommend I interview?”, and “What should I have asked but did not ask?”
• Do create a data collection form for each interview. This will contain things such as: the description of the investor profile, your open-ended questions, which hypotheses were confirmed and why, which hypotheses were invalidated and why, which hypotheses you gained no insight into and why, what changes you should make for the next interview (target customer profile, hypotheses, questions to ask).
• Do review and update your business model canvas as you validate your hypotheses regarding target customers and their needs.

Other ways to understand investors:

• Read research reports e.g. Tiger 21 reports.
• Document and analyze sales calls on investors.
• Interview your existing investors.

What are the challenges in interviewing potential customers?

• The FEC (Founders, or Existing Companies), passionately believe they have created right solution. They believe there is no reason to interview potential investors. They are focused on building the solution and selling it. Their passion results in them being unable to listen to, and understand, what the investors are saying.
• The FEC believe any sales and marketing problems can be fixed by changing the sales deck and changing the website.
• The FEC are passionate they have the right solution. Hearing brutal feedback from potential investors requires founders who are self-confident, self-aware that they don’t have all the answers, and have the ability to learn and adapt.  I’ve observed many people who are not able to learn and adapt.
• The FEC lack the personality and skills to contact a large number of strangers to setup and conduct interviews.
• Doing interviews appears to be lack of progress. Building a solution is more fun and appears to be progress.

Conclusion

You will fail if your investors do not believe your solution addresses their individual key needs.

 Footnotes:

¹ “What is a business model canvas?”  The following is a link to my article https://koorandassociates.org/tools/what-is-a-business-model/