So often the question is asked of me “how do I get funding?” While, often, the better question to start with is “is my venture fundable?” After a decade and a half starting, growing, and funding startups, I can tell you that it is a binary question. There is little grey area. First, there are clearly fundable and equally clearly unfundable ventures. Those that are clearly fundable are easy to spot as an investor. They share a number of characteristics: great team, great product/service, great market, solve a clear problem, and create clear value for the end customer. This is the subject matter of many text books and articles. But, even some of these don’t get funded. Why is that?
The answer is simple: “WOW!” If an investor says “WOW!” to the entrepreneur/idea/pitch/venture, then it will be funded…so long as the business terms are acceptable! That may sound too simplistic, but in reality it is a completely rational response and reaction. And, it has to do with Simon Sinek’s Golden Circle. The venture must “feel” right to the investor, and that manifests as “WOW.” No amount of quantitative information will make an investor say “WOW.” In fact, it is the opposite! This is why an overly technical and verbose pitch will almost certainly strike out, when a simple, direct, concise pitch that hits the sufficiently impressive, salient points is a shoo-in. Sadly, most entrepreneurs are so wrapped up in their own problems and the original “AHA! moment” that was the genesis of the venture, they fail to understand what creates the “WOW moment” with investors. Technical details certainly do not. Products with social stigmas do not. Lifestyle companies do not. Big markets with innovative solutions and barriers-to-entry coupled with clear marketing, sales, and exit plans do. Products that compel an investor to call friends and say, “I just heard about the most interesting company” do. Great entrepreneurs with successful track records do. Companies with strong IP positions do. Companies generating sales do.
All angel investing is an emotion a decision (aka Sinek’s Why). We use the business plan, proforma, our own experience, the experience of others, and deal terms to justify the venture has rational merit (What and How). If the venture is to be funded, it must it must appeal to the “Why” parts of the brain first. Then, the “What” and “How” parts must be satisfied. These last parts simply justify the emotional impetus. So, you ask, all I have to do is make the investor say “wow?” Unfortunately, no. The rational parts CAN and WILL override the emotional decision if you are dealing with an experienced, savvy investor. I have seen it and experience it many times. Fluff sells, but substance closes the deal.
So, what happens to all the fundable, but “non-WOW” companies? The answer is equally interesting. First, our emotional impetus extends to our family, friends, community, local accelerator, etc. This is why we have the term “friends, family, and fools” in the industry. Sometimes we are emotionally invested in the founder. Sometimes we are emotionally invested in our communities and thus willing to take a risk on a bright entrepreneur even when the idea does not stir us to do so. Sometimes it is a great idea and we hope a young or aspiring entrepreneur will rise to the challenge. This is to say that a non-WOW company can have an ulterior-WOW aspect that will get it funded. So, look for alternative WOW conditions of which you can take advantage.
The second element affecting non-WOW companies is the availability of capital. When capital is relatively plentiful, then investors are more eager to be “wowed.” When capital is scarce, we are less interested in being wowed, so the bar is raised. Again, this sounds overly simplistic. But, at the core of us all are simple impulses. It is our mental machinations and actions that become complex. The irony in this is when the monetary pool is small, valuations contract and even great deals get cheaper. We all say we want to buy low and sell high. That is how this is supposed to work! This is the time when the discipline of savvy, professional angels means the most.
What should you take away from this? If you are an entrepreneur, you need to learn to hit the WOW button. Investors want to love you, your product/service, and your market. This is the only joke in the world where you tell the punch line first! Clearly identify your WOW. Then, speak in clear terms that gives an investor the ability to say “WOW, that is a great idea” right up front. Then, follow through with the What and How in clear, concise terms to help the investor justify the decision to put hard-earned money at extreme risk with you. If you don’t have a WOW, then start over or look for alternative resources to grow to the point you have a WOW moment through revenue growth.
If you are an investor, most of the pundits in the industry believe 2016 will continue to see a shrinking monetary investment pool for startups. Be prepared to invest! We are.
Copyright Eric Dobson, 2016