Ten Investor Insights

Recently, I've noticed that when investors are describing what they look for in start-ups and early stage businesses, they are dropping in nuggets of gold that don't always get the notice they deserve. Yes, investors are looking for great ideas and slick pitch decks but here are ten things they say they don't see enough of.

1. Build your exit slide first.?

Once upon a time, every pitch deck included an “exit strategy.” But the investors I heard from are saying that lately, very few do. While most founders think exiting is about selling or being merged into a larger firm, the core idea here is telling investors, “here’s how you’re going to get your money back…and then some.” It might seem strange to build this slide first but reverse engineering from profitability makes sense when you’re asking for money.?

2. Character counts more than numbers

As someone who obsesses over hard numbers in pitch decks and business plans, this one hit hard. Investors not-so-secretly assume that most of those numbers are largely made up. I believe the actual quote was "we all know the numbers are b#llsh!t." What they really want to know is, will you take care of them when things go wrong? Will you communicate frequently and honestly? How will you accept advice and mentoring?

3. Have a detailed business plan?

This was another surprise for me. The majority of startups don’t have a business plan ready. Investors may not look at it right away but a detailed business plan (not just a roadmap or “lite”paper) becomes part of the due diligence process where potential investors dig into the nuts and bolts of your business. Yes, there are examples of startups getting investment without one but, you’re entering into a partnership that, on average, lasts longer than a marriage in the USA. If an investor isn’t doing due diligence, that could be a warning of things to come.

4. Include a marketing plan that includes Customer Cost of Acquisition

Investors are 3x more likely to invest if your business plan, pitch deck, and elevator pitch contain evidence of a well researched marketing plan. Investors are also I saying, “most startups dramatically under budget the cost of acquisition.” Yes, there are anecdotes of founders using the “build it and they will come” approach but remember, 90% of start-ups fail. I once crashed and burned in an Angel investor pitched when I underbudgeted my marketing. Nothing I could say after that could salvage my pitch. Founders should know how much to spend to acquire customers at each phase of growth. These Customer Acquisition Costs (CAC) vary wildly across industries. B2B SaaS CAC can be anywhere between $239 to $702 per customer! eCommerce is between $70 and $274. Fintech: $1450! Mobile apps hit $29 per install. Even mobile games come in somewhere between $1 and $6 (depending on genre and other factors) but this ads up fast. As a rule of thumb, a good CAC should have a ratio of 1:3 compared to customer lifetime value (LTV). Marketing is math. Lots of math.?

5. Do more customer discovery

Investors are saying that 90% of startups need more customer discovery before starting an incubator or looking for outside funding. Once you know the CAC and LTV for your category, dig deeper and deeper yet into who your customers are. What do they want? What do they hate? Where are they? How do they buy? Get hard numbers. Listen to anecdotal stories. Lurk around Reddit, YouTube comments, and get out into IRL. The temptation here is to assign too much weight to evidence that agrees with your hypothesis so test and test again. In one of my startups, our worst rated product in early surveys became our second best seller. In two others, the products never jumped the gap between early adopters and mainstream. Yes, you have to keep moving forward but investors need to be convinced you know the market even more than you know your product.?

6. Investors want more communications

No, they don’t need (or want) to know every detail of your day but you should establish a regular cadence of emails and private blogs that keep them apprised of how you’re doing. Don’t just give them an overly rosy picture. These communications are an opportunity for your investors to provide advice or make introductions to strategic partners. They do not want to feel out of the loop, hear about things through the rumor mill, or learn about things through the media. Communicate clearly, concisely, and often.?

7. Always be networking

The investors I heard from all described that they want to get to know you before you pitch. They want to see you at social events, over time. Social Psychologist Robert Zajonc calls this the “mere exposure effect” in which people rate familiar stimuli as more positive than similar things they are encountering for the first time. Remember how “character counts?” Repeated encounters are the best way to build rapport and demonstrate the truth of your character.

8. Do your wealth planning at the beginning

This is another odd one but founders and investors all agreed. Financially planning for success at the very beginning can save you big when the money starts rolling in. Do you know what? Founder's Stock is? How about liquidity planning? What kinds of corporate structures will save you on taxes? Consult a qualified wealth planner early on.?

9. Learn term sheets

When an investor decides to invest in your company, they will give you a term sheet. Get qualified advice on this but also, have a good understanding of the basic things you’re looking at. Term sheets can include your company valuation, security type (common or preferred shares), liquidity preferences, anti-dilution provisions, vesting schedules and a lot more. Term sheets can have a huge impact on your business and may affect how or if you get future investment as well as how decisions are made going forward.?

10. Practice, practice, practice

Investors don’t need to understand every aspect of the chemistry and coding in your idea, they need to believe that you do. When it comes time to pitch, you should know it better than you know your own name. Practice it with all types of audiences. Explain your business to a ten year old. Explain your business to an eighty year old. When both of them understand your idea and are as excited as you are, you’re ready to pitch.