Investor POV
Understand the job, psychology, and context of VCs to maximize the chances of closing your fundraising round.
In Company / VC Fit I talk about the mechanics and economics of a venture capital firm. In this section, I zoom into the perspective of an individual partner within such a firm.
Investor’s Day-to-Day
Let’s start by considering the day-to-day of an investor.
Fundamentally, being a VC is a sales-y kind of a job. In addition to working with their existing portfolio, investors comb through thousands of pitches a year, delve deeper into a handful of opportunities, and ultimately make very few (0-3) investments per year. Those dynamics have a number of implications.
First, it’s very hard to stay on top of things given the volume of opportunities. Investors are often criticized for not following up on emails or being absent-minded during meetings. And quite honestly those are not good behaviors. But given the typical investor day-to-day, it can’t hurt to have a bit more empathy for the folks on the other side of the table. This is why it is so important to have an introduction from someone they trust as well as fundraising materials that are simple and effective. Simply put, the audience’s attention span demands it. You have to rise above the noise.
Second, investors can afford to be both picky and patient. At any given time, many startups are clamoring for their attention and capital. Investors are generalists who don’t know most markets very well and plan to make very few investments. That is why they have a huge incentive to wait and collect more data to understand the industry and opportunity better. This dynamic further underlines the importance of running a tight process such as the one explained in this book, which is designed to create momentum that overcomes the waiting pattern.
Third, investors operate in an environment characterized by extreme uncertainty and ruled by outliers. Nobody really knows what will succeed and what will fail. Indeed, many of the world’s most successful startups were (in)famously underestimated or outright ignored by the venture community. With few facts to go by, investors develop and rely on pattern matching, which founders should leverage whenever possible. I discuss how to uncover those in Advanced Investor Pre-Qualifications as well as in The First Meeting.
Investor’s Context
Investors also operate within the context of their firm as well as the broader VC and LP community.
From a financial point of view, this means they need to make investments that have a chance of providing meaningful returns given the fund’s size - which comes down to focusing on specific ownership percentage as well as valuation and round sizes within verticals that are part of the theses adopted by the firm’s GPs and LPs.
From a human and political point of view, investors are part of a partnership. Each partnership is set up in a different way and contains all kinds of partners. Some firms have just a handful of partners, who are all equal. Other partnerships have large teams with a hierarchy and the associated politics that such a structure brings.
On the people side, some partners are so established and successful that they can effectively make unilateral decisions about what to invest in. Others might be more junior, either because they joined recently and haven’t had success just yet or because they are not General Partners that have carry and can make decisions. As you can imagine, these two types of investors will be looking at, assessing, and ultimately investing in companies in radically different ways. I talk about how to uncover such important information in The First Meeting.
Beyond their partnership, investors are also part of the broader VC and LP community, which itself has firms and partners with different track records, reputations, and statuses. A select few have made many billions over, while most have come away with nothing. This is an environment, where social proof rules. Investors want to invest when other, more accomplished or famous investors want to invest. How is that for a catch-22?
It’s easy to dismiss that as VCs being “lemmings“ but make no mistake - investors are both smart and keenly aware of psychological biases including the absurdity of following what other investors think. Nevertheless, they fall into the ”lemmings” trap because it is actually rational for them to do so.
In a highly uncertain environment ruled by outliers, there is a real absence of reliable signals that can help make a good decision. That is one big reason why VCs constantly talk amongst themselves - they learn from each other. In that context, the opinion of someone who has been right big time before naturally carries a lot of weight.
Second, there is actually a good reason why people with prior success tend to be more influential. Their track record attracts ambitious entrepreneurs, who want the best possible investors to help support their companies.
Finally, if nothing else, being associated with other great VCs allows the investor to extract value regardless of the quality of the deal - for example, to get into other hot deals or attract more capital from LPs.
Founders tend to complain about such dynamics. My advice is to accept reality and focus on designing a process that can maximize your chances of successfully closing your round. That’s really what the Fundraising Lore is all about, so hopefully it can serve as a foundation upon which you can build.
Investors Are People Too
All of the above can be summed up as “investors are people too.” Which is to say, each VC has walked a different path, had various successes and failures, and operates within a certain environment, which itself has various elements related to management, compensation, politics, economics, and so on. Fundraising is as much about psychology as it is about business. Entrepreneurs should be aware of the environment that investors operate in so they can maximize the chances of closing their company’s investment round.