How to think like an investor
What makes a good investor? Most people would think that understanding the world of business and negotiation is the key. This is mostly true but a good investor gains their title by moving ahead of the fundamentals of investing and relying heavily on their intuition which is based on their experience garnered from their time in the industry.
Strategies of a Good Investor
Investors looking to invest in a project typically rely on the perception of other shareholders towards said project. Inexperienced investors would think that being ahead in the negotiations is the deciding factor for who gets to invest but that usually isn’t the case. Studies have shown that backers who rush towards investing in a project (called a stampede) typically fail. Those who show a little bit of interest at first are the ones to succeed due to small amounts of scepticism in the project.
The basics of investing is to raise money, be liked by the project creators as well as other investors and negotiate. There is also an established give and take relationship between an investor and a founder. If an investor invests in a project that has raised no money then he/she should expect bigger returns. A company’s value is dependent on the money it has raised. Getting along with the investor(s) is essential to securing a backer for your project. When investors have a positive view of you, that translates to your company.
Experienced entrepreneurs aren’t influenced by the interest rush of other investors. They are more likely to strategically analyse the risks and benefits of investing in a project which in turn makes them more desired.
Negotiation is the bedrock of acquiring an investor. Unless you are an expert negotiator, do not try to inflate the value of your business as the investors can instantly catch on. While negotiating, be careful to not disrespect or insult the investors especially while refusing a particular offer.
Becoming a good investor is no simple task. It requires years of experimentation and studies to understand how the market works. Thinking like a venture capitalist is more difficult than becoming one. Strategising, planning and negotiating are the key skills one needs to succeed in the investing business. Endowments aren't only related to the business side of things but also the people side. Majority of good investors are also a good judge of character, so if you want to succeed in this endeavour then bring out your charm.
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The perception that most investors have of you is largely based on what other investors think. Naturally, this results in exponential development. When one investor decides to invest in you, other investors will want to do the same, which will lead to more interest.
Sometimes unskilled founders make the incorrect assumption that controlling these dynamics is the fundamental component of financing. They read accounts of investors rushing to invest in successful businesses and believe that this is a sign of a successful startup if it happens. However, there isn't really any correlation between the two. A large number of firms that provoke stampedes eventually fail (in extreme situations, partially as a result of the stampede), while a large number of really successful startups were only somewhat well-liked by investors the first time they received capital.
As a result, the purpose of this essay is to simply describe the dynamics that cause stampedes rather than how to produce one. These dynamics are constantly at play in fundraising to some extent, and they might result in unexpected events. You can at least prevent getting startled if you comprehend them.
When other investors like you, you really become a better investment, which makes investors like you more. Raising money reduces the likelihood of failure. Indeed, even if investors despise it, you have every right to increase your valuation for future investors. Investors that made investments when you didn't have any money did so at more risk, and they should be compensated with bigger returns. Additionally, a business that has raised money is inherently more valuable. The company's value increases by at least a million dollars after you raise the first million dollars since it remains the same business and now has a million dollars in the bank.
But be careful—later investors detest to have their prices increased on them so much that they will fight even this obvious argument. If you want to increase the price on an investment, only do so if you can lose that investor without becoming angry.
The second reason why having some success with fundraising makes investors like you more is because it gives you more confidence, and an investor's view of you is the cornerstone of their opinion of your business. When founders start to succeed in raising capital, they are frequently taken aback by how rapidly investors appear to pick up on it. And while there are a variety of ways for investors to learn about such information, the founders themselves are probably the key channel. The majority of investors are rather adept at reading people, despite their frequent ignorance of technology. Investors can quickly detect a successful fundraising effort from your heightened confidence. The incapacity of the typical entrepreneur to maintain a poker face in this situation really works to your benefit.
However, investors are more likely to like you once you've begun to raise money since they struggle to evaluate companies. Even the greatest investors have difficulty evaluating businesses. The average performers might as well be tossing coins. As a result, when average investors notice that many others want to invest in you, they feel there must be a good reason. As a result, you experience the "hot deal" phenomena, which is characterised by an excess of investor interest.
The best investors aren't too swayed by what other investors think. To average their judgement with that of others would only weaken it. However, they are also indirectly affected in the real world since deadlines are imposed by investment interest from other investors. The fourth method that offers create more offers is in this manner. A firm may push other businesses, even strong ones, to make up their minds in order to secure the transaction if you start to move far along the route toward an offer with that firm.
Be very cautious when inflating this to persuade a savvy investor to make a decision unless you are an expert negotiator (and if you're not sure, you aren't). Founders frequently try this kind of activity, and investors are quite aware of it. oversensitive, if anything. However, if you're being honest, you're safe. If investor B is helping you out a lot but you'd like to seek funding from investor A, you can let investor A know. That is not manipulative in any way. You're in a difficult situation because, although you'd like to raise money from A, you can't safely reject an offer from B while it's still unclear what A will decide.
But keep B's identity a secret from A. There are occasions when VCs will inquire as to which other VCs you are speaking with; nevertheless, you should never provide this information. Due of their greater interdependence, angels occasionally provide information about other angels. But if VCs inquire, just say that they wouldn't want you to tell other firms about your discussions, and you feel obligated to do the same for whatever firm you speak with. If they insist, say that you are new to fundraising and that you believe you need to be extra careful. This is always a good card to play.
The majority of companies will at least initially encounter the reverse side of this phenomena, when the herd remains clumped together at a distance, even while only few will see a rush of interest. You always start off in somewhat of a hole since investors are so greatly affected by other investors' thoughts. Don't let getting the first commitment's difficulties demotivate you because a lot of the difficulty is caused by this outside factor. The following will be simpler.