Everyone—and I mean everyone—who is trying to start a business at one point or another goes looking for capital. But not everyone SHOULD go looking for capital. Investors are looking for very specific criteria when they invest. They are looking to reduce risk while increasing return. Entrepreneurs are exactly the opposite. I talk a bit about how investors look at deals in this short episode.
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What should all first time startup founders know about raising capital? I've been on both sides of the funding table. The view from each side is so tremendously different. It's almost like sitting, not on a different side, but at a different table in a different office, in a different city, in a different state. Entrepreneurs, especially new ones, tend to look at all the points possible ways they could win big, be successful and knock it out of the park. There's nothing wrong with this point of view. However, there are so many non-deterministic factors working when it comes entrepreneurial success that thinking you have your hands on them is naive. All entrepreneurs have pitched decks that show hockey-stick type growth. Everyone knows how to use Excel to create graphs that zoom up and to the right. What assumptions are buried under those graphs is what is most important and what should it be brought to the surface and discussed with investors. So entrepreneurs are risk seeking, trying to hit a home run, but using OPM other people's money. On the other side of the table are investors. The more sophisticated the investor, the more options and choices of where to put money to work. Investors know that all growth focused entrepreneurs have hockey-stick growth models and are convinced they're positioned to be the next Google of their industry. They also know, the number of uncontrollable or unknowable factors that leads to success are significant. So investors are looking to reduce risk at every possible point. Investors, in the vast majority of cases, are risk averse. The more options they have, the more risk adverse. They are looking for every way to say no, so they can find the needle in the haystack that has answered all of the no's and they must say yes. In fact, investors are looking for risk adjusted return, as opposed to just a standard ROI. So what should first time founders know about raising capital? That the person across the table has exactly the opposite point of view about investing as you do. So your deck should always address as many points about possible risk. Address how you will find market fit. Address, who the competitors are and how you will build a competitive moat. In short, address how you will not lose investor money all the while, giving them access to return. Basically increasing their RAR. Know who you are speaking to on the other side of the table and see the world through their eyes the best way you can.