When people hurt themselves
lifting heavy things, it’s usually because they try to lift with their back.
The right way to lift heavy things is to let your legs do the work.
Inexperienced founders make the same mistake when trying to convince investors.
They try to convince with their pitch. Most would be better off if they let
their startup do the work—if they started by understanding why their startup is
worth investing in, then simply explained this well to investors.
Investors are looking for
startups that will be very successful. But that test is not as simple as it
sounds. In startups, as in a lot of other domains, the distribution of outcomes
follows a power law, but in startups the curve is startlingly steep. The big
successes are so big they dwarf the rest. And since there are only a handful
each year (the conventional wisdom is 15), investors treat “big success” as if
it were binary. Most are interested in you if you seem like you have a chance,
however small, of being one of the 15 big successes, and otherwise not. [1]
(There are a handful of angels
who’d be interested in a company with a high probability of being moderately
successful. But angel investors like big successes too.)
How do you seem like you’ll be
one of the big successes? You need three things: formidable founders, a
promising market, and (usually) some evidence of success so far.
Formidable
The most important ingredient is
formidable founders. Most investors decide in the first few minutes whether you
seem like a winner or a loser, and once their opinion is set it’s hard to
change. [2] Every startup has reasons both to invest and not to invest. If
investors think you’re a winner they focus on the former, and if not they focus
on the latter. For example, it might be a rich market, but with a slow sales
cycle. If investors are impressed with you as founders, they say they want to
invest because it’s a rich market, and if not, they say they can’t invest
because of the slow sales cycle.
They’re not necessarily trying to
mislead you. Most investors are genuinely unclear in their own minds why they
like or dislike startups. If you seem like a winner, they’ll like your idea
more. But don’t be too smug about this weakness of theirs, because you have it
too; almost everyone does.
There is a role for ideas of
course. They’re fuel for the fire that starts with liking the founders. Once
investors like you, you’ll see them reaching for ideas: they’ll be saying “yes,
and you could also do x.” (Whereas when they don’t like you, they’ll be saying “but
what about x?”)
But the foundation of convincing
investors is to seem formidable, and since this isn’t a word most people use in
conversation much, I should explain what it means. A formidable person is one
who seems like they’ll get what they want, regardless of whatever obstacles are
in the way. Formidable is close to confident, except that someone could be
confident and mistaken. Formidable is roughly justifiably confident.
There are a handful of people who
are really good at seeming formidable—some because they actually are very
formidable and just let it show, and others because they are more or less con
artists. [3] But most founders, including many who will go on to start very
successful companies, are not that good at seeming formidable the first time
they try fundraising. What should they do? [4]
What they should not do is try to
imitate the swagger of more experienced founders. Investors are not always that
good at judging technology, but they’re good at judging confidence. If you try
to act like something you’re not, you’ll just end up in an uncanny valley. You’ll
depart from sincere, but never arrive at convincing.
Truth
The way to seem most formidable
as an inexperienced founder is to stick to the truth. How formidable you seem
isn’t a constant. It varies depending on what you’re saying. Most people can
seem confident when they’re saying “one plus one is two,” because they know it’s
true. The most diffident person would be puzzled and even slightly contemptuous
if they told a VC “one plus one is two” and the VC reacted with skepticism. The
magic ability of people who are good at seeming formidable is that they can do
this with the sentence “we’re going to make a billion dollars a year.” But you
can do the same, if not with that sentence with some fairly impressive ones, so
long as you convince yourself first.
That’s the secret. Convince
yourself that your startup is worth investing in, and then when you explain
this to investors they’ll believe you. And by convince yourself, I don’t mean
play mind games with yourself to boost your confidence. I mean truly evaluate
whether your startup is worth investing in. If it isn’t, don’t try to raise
money. [5] But if it is, you’ll be telling the truth when you tell investors it’s
worth investing in, and they’ll sense that. You don’t have to be a smooth
presenter if you understand something well and tell the truth about it.
To evaluate whether your startup
is worth investing in, you have to be a domain expert. If you’re not a domain
expert, you can be as convinced as you like about your idea, and it will seem
to investors no more than an instance of the Dunning-Kruger effect. Which in
fact it will usually be. And investors can tell fairly quickly whether you’re a
domain expert by how well you answer their questions. Know everything about
your market. [6]
Why do founders persist in trying
to convince investors of things they’re not convinced of themselves? Partly
because we’ve all been trained to.
When my friends Robert Morris and
Trevor Blackwell were in grad school, one of their fellow students was on the
receiving end of a question from their faculty advisor that we still quote
today. When the unfortunate fellow got to his last slide, the professor burst
out:
Which one of these conclusions do
you actually believe?
One of the artifacts of the way
schools are organized is that we all get trained to talk even when we have
nothing to say. If you have a ten page paper due, then ten pages you must
write, even if you only have one page of ideas. Even if you have no ideas. You
have to produce something. And all too many startups go into fundraising in the
same spirit. When they think it’s time to raise money, they try gamely to make
the best case they can for their startup. Most never think of pausing
beforehand to ask whether what they’re saying is actually convincing, because
they’ve all been trained to treat the need to present as a given—as an area of
fixed size, over which however much truth they have must needs be spread,
however thinly.
The time to raise money is not
when you need it, or when you reach some artificial deadline like a Demo Day.
It’s when you can convince investors, and not before. [7]
And unless you’re a good con
artist, you’ll never convince investors if you’re not convinced yourself. They’re
far better at detecting bullshit than you are at producing it, even if you’re
producing it unknowingly. If you try convincing investors before you’ve
convinced yourself, you’ll be wasting both your time.
But pausing first to convince
yourself will do more than save you from wasting your time. It will force you
to organize your thoughts. To convince yourself that your startup is worth
investing in, you’ll have to figure out why it’s worth investing in. And if you
can do that you’ll end up with more than added confidence. You’ll also have a
provisional roadmap of how to succeed. |
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