As you might know by now, venture capital is an industry with a high failure rate.
Standard & Poor’s recently reported that bankruptcies by venture capital and private equity portfolio companies are reaching their highest numbers since 2010, and these include companies that raised over $1 billion in venture capital, like Vice Media.
In this line, it is unfortunate that we still do not hear enough venture capitalists talking about their mistakes, or at least not with the same frequency as they indulge in self-congratulatory speeches.
However, in those cases in which VCs do talk about failure, you might often hear them echoing reasons like unpredictable market shock, or a “Black Swan” event, bad timing, wrong leadership team, unsupportive co-investors or a poorly designed business model that ended up being unprofitable.
While these concepts are useful for a precautionary tale in an MBA case study and often, in effect, impact the return on investments, the sheer number of non-economic mistakes made by VCs due to their human nature is seriously underestimated. Given the present liquidity crunch, I tasked myself with understanding these blind spots and transforming them into actionable advice for entrepreneurs actively fundraising. There are many, but today I will discuss three of them, which have cost investors a lot of money and are essential for anyone planning to pitch their startup to an investor to be aware of.
Many investors are more likely to support a founder they feel a personal connection with
This is true even if their numbers and product are worse than those of a founder they find less likable.
When a moment of human connection happens, it is hard to dismiss it. Therefore, if we forge this bond with someone, we will automatically trust that person more.
The sheer number of non-economic mistakes made by VCs due to their human nature is seriously underestimated.
Many reasons can lead to this bond. Maybe they also play golf or football, are alumni of the same university that we went to, or have a similar sense of humor. It is hard to predict. However, what is undeniable is that by seeing the newly met individual as one of “us,” we are already lowering our defensive barriers. We feel safe in their presence and are more likely to feel at ease investing in their venture.
On the other hand, if the person feels like a stranger, the amygdala in our brain activates, and our survival instinct kicks in. In the “us versus them” concept that we all form in our minds, they are “them”; therefore, our brain says, we are better off being wary.
Most VC funds have multiple partners, and their personalities vary widely. This is done intentionally to help the fund connect with a more diverse base of entrepreneurs and counter these potential biases. Hence, at any fund you approach, understanding more about the different investors’ human side will help you know who to go to. Before pitching a venture capitalist, take the time to learn more about them as human beings. Once you’ve studied them this way, you can have an idea of who you would click with and approach them accordingly.
I can share with you examples of how this can be done with our team. For instance, Joel is one of our partners, and he prefers active, passionate, and high-energy founders. On the other hand, Saagar is more likely to resonate with those founders who are scientists or tech experts and who can delve deeply into the technological side of a startup. Then there’s Ruslan, who melts when the founder is very strategic and can simultaneously be detail-oriented. And of course, there’s me, who loves entrepreneurial founders with a huge pirate spirit.
As investors, we can suffer from short attention spans
This happens because we are constantly stimulated through various channels, and feel the need to be constantly connected.
We investors are supposed to be good listeners and pay attention to everything that you are here to tell us. After all, our decision is important. We are here to choose whether to give you money or not, and to make that choice, we need enough information— your metrics, product, team, and more.
But because we live in the age of constant stimulation and instant gratification, we often can derail and browse through X while you are talking about your product, or we’re formulating our next question before you are done answering our previous one. I heard the story of an investor who actually fell asleep during a Zoom pitch. You get the idea.
I do not deny that this is a blatant problem in the investing world and a cause of many mistakes. However, now that you know what you are working with, here’s a piece of advice.
If you are talking about your company, and the venture capitalist at the table is on their phone all the time, first, don’t take it personally, and second, change the tone of your conversation. Make them feel included, like it is a two-way dialogue instead of a unilateral presentation. The more engaged we feel during our time together, the less likely we are to search for this stimulation elsewhere. When sharing your story, it also helps to be clear instead of drifting around from point to point. This makes it more likely that we’ll pay attention.
I would also advise you to craft your pitch in a way that engages both the left and right brain. Provide numbers and facts, but don’t forget to add a personal story and a personal touch to emotionally involve the investors. Another technique: If you notice that the investor is distracted or losing focus, address them by their name. Finally, choose meeting places with minimal distractions — for instance, a conference with 500 attendees constantly passing by is a poor choice for a conversation.
One of the worst mistakes investors make is driven by the lack of independent thinking and FOMO
Another problem that is plaguing the venture capital industry right now is the lack of independent thinking. Many venture capitalists I know, when I ask them about the best deal they have ever invested in, they bring up a company that nobody else believed in and was, potentially, about to fold. I cannot help but ask myself: Why, for many others, the primary question remains “Who else is investing in this funding round?”
It is unfortunate, but it is a psychological issue that you need to understand if you are raising money, because the way you introduce the company will likely determine whether VCs will fund it or not. If you are able to create FOMO (fear of missing out) around your industry and your startup (we are less valuable when we are in search of) and can project a confident image, then you’re more likely to get the funds you need. Conversely, if VCs see you as a company that is struggling to gain traction and get investors on board, their fears and survival instincts will be triggered, and they will see your project as something to stay away from.
We know that VCs are human and make mistakes and those mistakes can be costly, despite their desire to approach situations objectively and the increasing diversity that is permeating within the funds. The three subjective aspects I shared above are only three of many additional elements that can influence our decisions. This is unlikely to change. Temperament traits — for example, if you are an introvert or extrovert — and points of view surrounding the world’s events also impact our choice, and honestly, even personal preferences can have the final say.
However, even if you have overcome these hurdles or managed to find a way to work with them, it doesn’t negate the chemistry that should exist between a VC and a founder. If things go well, you will be working together for 10 or 15 years, and it’s crucial that you speak the same language. Therefore, it makes sense to prioritize investors with whom you are a match. Given the abundance of information in the media and on social networks, all you need to do is carefully get to know the investors you plan to pitch to. For example, today you’ve gotten to know me a bit.