How much do investors want?
money spins the world
Hey there,
When chasing investors and talking them into your pitch, you need to understand the most important thing they are after: the return on the investment.
Your startup can be cool, or can have noble mission and objectives, but at the end of the day, working with professional investors should be profitable for them. Their job is like any other job - a developer, a designer or a startup founder - and it involves making financial bets that within a reasonable time should return the same money (principal) and an extra for the risk taken (the return).
For example, if investors keep the money in the bank, the return will be low, usually less than 1-2% per year. It they invest in governmental bonds, the return is around 3-5% and if they invest in shares of companies listed on the stock exchange, they should expect returns on average between 5 and 10%. Those numbers are orientational and depend on all sorts of factors, as well as subject to the current macro environment.
The investors looking to fund startups have higher return expectations since the risks are much higher - hence the expression “the higher the risks, the higher the returns”
How much is that much though? Conventional wisdom in the investors circles is this:
early stage (pre-seed to series A) - 100X
growth stage (series B and series C) - 10X
pre-IPO - 3X
So if you’re building a startup now and think of raising money from professional investors, you have to sell a path to provide at least 100 times more back to them. That usually translates into a few things - a big market supporting that 100X return, a global plan for international expansion, and your competitive advantages that will make you capable to execute against your vision.
Have those wrapped up in a nice little narrative detailing your business and there you go, you’ve got your fundable story. :-)
Talking to investors is a normal sales process, like with any customer - you tell them what they want to hear and then get them to sign the dotted line. Understand what they are after and half of the job is done.
I answered to more than 50 emails with investors suggestions - if I missed any, please ping me again.
I am happy that I could be helpful, that’s the whole point of what we do at Project Arrow. I do have a few observations to keep in mind for the future:
in general, follow the format you are asked for. If you don’t, you make my job much more difficult.
even if you don’t, try to put into words the essential explained in simple terms, so that I could get what the startup is doing just by scanning the text - a 500-word description may be too much.
have a website (or a digital placeholder) that describes very clear what you do and how you make money. That is your equivalent of a business card and should be a great sales support to any executive summary or elevator pitch you have.
the best way to understand fast what a company does is by looking at the pricing scheme - if you don’t have one yet, explain the value proposition in very simple terms - remember, so simple that even my grandmother should understand it.
try to make every email exchange an opportunity for building a conversation - the more info you exchange, the more likely the other party will get engaged and helps you. Always ask yourself - what do I want the other party to remain with after this email exchange? Some of you did just that and that’s great - remember, always be selling!
Take all this and put in the context of an email exchange with an investor.
We’ll do this more often, stay tuned.
- Dragos