Recently, while talking with one of the startups I advise I was struck by how misunderstood investor motivations were. In an effort to help the uninitiated gain insight into the minds of angels, super-angels, VC partners, and ”job-creators” in general, I humbly present “The Three F’s of Investor Motivation”.
(Apologies for the glaring generalities and stereotypification. Not all investors are so easily categorized, I simply want to provide a framework for entrepreneurs to work from when assessing a potential investor-fit.)
The most traditional, fortune is the motivation that you’d expect an investor to have. Critical analysis of the product’s potential to make them money is the cornerstone of this tenet with investors looking at not only opportunity for revenue generation, but opportunity for exit.
These investors aren’t interested in how cool the product is, how much good it’s doing children in the third-world, or that you’d like to “stay small and grow organically”. Math is the driving factor here, and you need to be able to speak to not only the path to revenue / growth, but to the ultimate potential return for the investor. Terms will be negotiated, re-negotiated, and re-negotiated again until the structure provides for the outcome the investor expects. Tranches will be suggested, with specific milestones gating each cash influx.
These folks love proven business models, experienced and talented teams, a show of traction, and metrics. They typically dislike fads, bubble-ish terms, and “new” ideas.
What to have in your pitch deck:
- Metrics to date & projected
- Specifics about proposed investment terms and use of capital
- Math & assumptions around revenue projections
- Exit opportunities and reasoning behind each
The celebrity investor is less interested in the money your company could make them (though the point of the Venn diagram is that every investor is a combination of all three motivations) and more interested in what people will think about their investment. Your product’s glamour factor is the cornerstone of this tenet with the investor anticipating what level of “halo effect” they’ll receive by being involved.
These investors want people to know how rich, savvy, hip, and knowledgeable they are. They will offer terms without seeing any details just to impress the new intern in the room. They will leave the meeting and tweet about being pitched by you, how naïve you were and how they’re going to help you “make this thing real”. They obsess over their Klout score, Google themselves, have a column in TweetDeck with a standing search for their name or their firm’s name.
These aspiring luminaries want attention, to be known as “rock stars” or “super-angels”, to be respected by their peers, and to be part of “the scene”. They want your business to make as much noise as possible, to be viewed as successful no matter what, and to be cool as ice. Fads are preferred and terms / DD are almost ignored. They hate B2B, things that “won’t scale”, and couldn’t give two shits about revenue models. They’ll suggest turning down an acquisition if the acquiring brand isn’t trendy enough.
What to have in your pitch deck:
- Scale projections, the bigger the better (we’re talking %s of the world’s population)
- A “cool” brand and social strategy, previous viral growth examples are a bonus
- Buzzwords like “Premium”, “Rock star”, “Eyeballs”, “Social Media Strategy”, “Viral”
- Comparisons to devastatingly hip brands, “We’re like Pinterest for X!”
These guys/gals want to be involved. They’re the social investors. Fun-motivation heavy investors are typically the gals/guys that have some extra cash and are looking for something interesting to spend their time on. The cornerstone of this investor’s thesis is “Hey, that looks nifty! How can I help?”
These investors get what you’re building. They understand your business model, the challenges that you’re going to face, and want to help. They can be counted on to pick up the phone and call that big potential client. They want to tell their friends about what you’re doing. They view your success as their success.
These folks are your partners in crime (whether you like it or not). They are going to show up to your office and offer to help. They want to know details of what you’re doing, thinking, planning, eating, drinking, spending on, talking about when they’re not around, etc. They aren’t fans of people who do things differently than they might. They will give advice on how to dress and speak and use your hands when pitching. They want to know how their money is being spent. They hate founders taking vacation, not having their advice followed, and not being told immediately if an analyst at a third-tier VC cold-called asking if you are “lookin’ to raise”.
What to have in your pitch deck:
- Include “Adult Supervision” in your ask slide
- Micro-managerial details of how capital will be spent
- A need for their expertise & connections
- Proof that you’d be fun to grab a beer with
The “Best” Investors
As you might expect, there are infinite varieties and combinations of the three F’s. No potential investor is wholly motivated by a single tenet, and most are a blend of all three. Additionally, all three can provide great benefit to your business. Fortune investors can help you keep your business model in line, help you optimize your process, and keep you honest. Fame investors can bring a great deal of partners, customers, investors, and traction to the table by simply being involved. Fun investors help you execute, and can bring a fresh set of eyes to the situation that you would have never expected.
There are plenty of other motivations as well. Even altruism can appear when the occasion arises. Living in the Midwest, I see lots of people motivated to “help local entrepreneurs”, which is nothing if not commendable. Some people just have money to blow and want to be able to tell their friends that they’re “doing a start up”. Others are in it for the thrill of the negotiation. They’ll tell you about how much they can help, what they’ll bring to the table, how much they believe in you, then negotiate the harshest deal they can. These guys lose most of their interest the second you sign the term sheet.
It comes down to what you and your company need. Need a connector who will raise your company’s profile? Find a an aspiring celebrity super-angel. Need help getting your business model’s math to balance? A savvy former CPA and tax attorney will show you the way. Need a mentor who will help you take it up a notch by joining you in the trenches? Find a serial entrepreneur who just came off an exit and is bored with being on vacation.
Ultimately, the best investors are the ones that have a balanced blend of Fortune, Fame, and Fun. The guys that are smart about their money, are well connected and respected, will grab a beer with you to chat about how they can help (and then actually follow through), and that realize there is inherent risk to what they’re doing with their money.