I recently spoke at Collision and the format was really fun. Four entrepreneurs each pitched me in two minutes with no slides, and I provided reactions and tips in front of the audience. I had never met or seen any of these companies before.
As you might have guessed, I saw some familiar patterns. Among the many questions I got asked at the end of the session by the audience were:
- How much revenue do I need before a VC will commit to invest?
- How do I demonstrate traction sufficient to get an investor to commit?
- How can I help the investor understand that this is a “really big opportunity?”
If only it were this formulaic. Of course, there is no “the investor” (they’re all different humans with their own focus and bias) and there is no “magic line” of revenue that automatically makes any investor want to invest.
All of these questions reminded me of how Techstars Chief Investment Officer, Jason Seats, explains to startups how to get an investor to say yes.
Jason likes to explain that getting an investor should be thought of as a search operation and not as a persuasion exercise. In other words, you should spend your time with investors that are naturally interested in what you’re doing, rather than trying to convince every one of them that they should be interested. You’re far more likely to run out of time and energy to pitch investors than to actually run out of investors to pitch.
So, what does it take to convince an investor to commit?
Jason talks about the investor needing to “believe in the inevitability of your success.” They have to picture that this is going to work, with or without them. To get there, they’ll need to have the following mindset about your startup:
- They must have an instinctive belief that your company is attacking a substantial opportunity with plenty of whitespace.
- The thing you are doing actually solves the problem in that market.
- You have the ability to execute well against this idea.
When you really simplify things, most investors who believe these three things are great candidates to invest in your company. Those who do not believe them are not going to invest.
So, Jason says, your job is to help investors believe these things.
Let’s dive in a bit.
#1 (belief in a big opportunity) doesn’t mean that you need to show them a giant total addressable market (TAM) using math. Note the word “instinctual.” Focus your time and energy on investors who “get it” and intuitively feel the scale of the opportunity. Don’t try to convince them with math. Instead, try to find less direct ways to help them see the magnitude of the opportunity, in general terms. For example: “What if everyone could push a button on their smartphone to get a ride instantly? Wouldn’t that completely disrupt the entire transportation industry? We can make it a reality!” (Sorry! Uber already did it! This is basically what Ryan Graves said to me when Techstars invested in the angel round). There are no numbers here… just a simple vision of the future that is clearly big and exciting on an intuitive level.
#2 (the thing you are doing actually solves the problem in that market) can be demonstrated through one of a few hacks. Traction is the most obvious of these hacks. For example, when customers are willing to pay and give you margin then the investor can believe that the product solves an important problem. Note that there’s no “magic number” you need to get to, such as $100,000 in revenue. This tells investors nothing about the ultimate scale potential of your business, nor about the likely outcome. There are other “hacks” to show that what you are doing actually solves the problem in the market. I’ve seen companies do this even before they launch the product through letters of intent or even commitments to use or purchase the product well in advance of its development. If you can show the market is hungry for your product, this
For #3 (you have the ability to execute), again, traction is the easiest hack for most people. But you can also demonstrate this through your prior work, products, and/or successes. Interestingly, if you use the traction hack for #2, you’re also solving #3 (you have the ability to execute). But there are other ways to show that what you are doing actually solves the problem in the market. I’ve seen companies do this even before they launch the product through letters of intent or even commitments to use or purchase the product well in advance of its development.
Next time you’re engaging with an investor, help them understand these three things to improve your odds of landing an investment. If they don’t get there, move on and continue the search. And recognize that #1 alone is not enough. Be introspective about how you’re going to help them believe #2 and #3 also – that part’s on you!