Investor Priors Through a Founder Lens

As a founder, it’s your job to be obsessed with your product, market, and pretty much everything else about the company you’re trying to build.

It turns out (and I know this feels like it should be obvious, but give me a moment) that investors operate differently.

I’m not just talking about investors having a more finance-oriented mindset – indeed, while this is something shared by nearly all investors I meet, the best investors have also shown clear passion for the subject matter and thrill at experiencing other aspects of the business’s growth.

No, what I’m talking about is the fact that the success criteria for an investor is very different from the success criteria for a founder. This is a critical gap to navigate – as founder, it’s your job to find investors whom you’ll be able to align with the success criteria of the company; but first, you have to demonstrate to the investors that your company aligns with their own success criteria.

So what are these differences I’m thinking of? Let’s talk through a few examples.

Optimize the portfolio, not just the company

Founding a startup means going all-in – the only success that matters, and only thing you’re paying attention to, is your company.

Investors, though, have a portfolio of investments. These investments often span various markets or business models, and hedge the investor’s risk of any particular approach being the wrong way to go.

This means an investor isn’t merely evaluating your company in a silo – they’re trying to see how it fits into the portfolio as a whole. Do you have synergies with other companies or founders they are working with? Do you help them gain a clearer picture of a market they care about, or match closely enough to previous companies that the investors can be confident their advice will be useful?

Of course, one of the most significant differences between founding a startup and investing in a portfolio is the scale. Founders win when their company wins, but investors need a win so big their whole portfolio comes out on top. And that’s made all that much harder, because…

Investors and founders have different upside

You, as founder, likely own a large chunk of your business; but most investors won’t have more than a fraction of the equity that founders do. Couple this to the fact that investors often have portfolios in the hundreds of millions, and they absolutely need a huge win in order to earn enough to offset their investment. (After all, most startups, and most of their investments, return nothing or next to nothing, so if yours is one of the successes, it had better be so in a major way!)

It’s also important to remember that these dynamics can become even more complicated depending on your exit strategy. If your company is acquired after becoming a major success, you as founder may receive a hefty compensation package to ensure you stay on and continue to lead the organization fruitfully. In this case, the acquiring company would be more focused on allocating funds towards locking you up than benefiting your investors – and your investors know that. This isn’t to say that acquisitions aren’t a viable exit, but it’s important to think through the full implications of an acquisition offer, and to realize that your investors may feel differently than you about the value of taking such a deal.

Time is money – and money is fungible

Investors see a lot of deals. A lot.

Now, startups destined to become unicorns are rare – roughly 1% of startups which successfully have raised seed funding go on to become unicorns, according to this study, with about 5% clearing $100M valuations.

But that still means 1 in 20 startups that have raised seed rounds will reach this valuation. And investors see a lot more than 20 such startups. Which means that, despite the rarity of true success stories, investors can have good confidence that, as long as they only miss potential winners occasionally, they’ll still find more than enough good candidates to fill their portfolio.

All of which is to say that if an investor doesn’t immediately grok why your company is going to be a legendary success, it’s probably a better use of their time to pass on you and go read six more pitch decks, rather than taking an hour extra on the off chance that you change their mind and they realize you were worth it.

Even if you are.

This was the most surprising lesson to me when we first started fundraising. One investor actually misunderstood Modulate severely enough to believe we were building a digital audio workstation (though of course this can largely be pinned on us, as we were still very early and hadn’t developed our ability to tell the story yet.) Upon hearing this investor’s feedback, I immediately attempted to explain how he was mistaken, but he cut me off and told me that he didn’t really care if he was wrong – it wasn’t worth his time to check every time a founder disagreed with his assessment of their company.

In retrospect, I really appreciate the candor of that investor, as he gave me a really deep look into the psychology of venture capital with that one comment.

Of course, I should state clearly that not all investors will be nearly this extreme in their actions. They’ll fall along a spectrum of willing-to-listen-though-still-skeptical, all the way to behavior like what I described. But it’s nonetheless important to understand that investors aren’t just looking for a hit – they’re looking for several, and the longer you take to convince them it’s you, the more opportunities they’re missing out on in the meantime. If there was ever an argument for having a powerful and concise pitch, it seems to me that this would be it!

I hope it’s clear that none of the above are condemnations of investors. I’m not meaning to say that investors won’t support the founder or look out for their interests – indeed, we’ve generally found that our investors will go against their incentives to ensure we receive advice from all perspectives. (I suppose one could argue this is the long game, where they wish to cultivate a good relationship to get in on future deals if we’re successful…but the fact remains that they’re prioritizing what’s best for us, especially when we’re still first-time entrepreneurs and so most susceptible if they chose to manipulate us.) But investors do have a different incentive structure than founders, and I’ve found that understanding the perspectives they’re coming from has only helped me develop a better relationship with our investors. Hopefully sharing some of what I’ve learned will help you to do the same!

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