A Few Things VCs and Investors Want You to Know, But Won’t Tell You
They Want Open Lines of Communication
Investors may come across as busy and put on the show they want less correspondence, but that is simply not true. In fact, most investors expect periodic updates and leveraging their expertise and counsel as your business grows. If you are an entrepreneur and not leaning on your investors, you are setting yourself up for bad news. Transparency and being upfront about successes and challenges are required for investors, even if it is not written into the term sheet. This open dialogue builds trust, helps find solutions during trying times and creates a framework for future opportunities. Unfortunately, many entrepreneurs make the mistake of taking the money and running — going silent because they are (1) too busy; (2) too scared or embarrassed to openly talk about company shortcomings or lackluster performance; and/or (3) have no plan to succeed as a business. All are understandable and often not malicious (though they can be). Make investor relations a priority — not a chore.
They Are Inclined to Re-Invest in Existing Deals vs. New Ones
When an investor looks at his or her portfolio, there are often many companies in the mix. Horses in the race, so to speak. The time will come when the investor will be faced with a choice to invest in a new venture or re-invest in an existing company that is eking by but needs help — and without the assistance will falter. An investor puts some value on the investment and if one has to be shut down, it goes to $0. It’s a lot easier to keep the horse going a little longer to see if he can reach the finish line rather than train a new horse where there are so many unknowns. What does this mean for entrepreneurs? If you are lucky enough to have investors on board, recognize that getting some extra help, especially when you do not need it, may be easier than you think — especially if you are keeping lines of communication open. If you are seeking a first-time investment, recognize that the merits, potential ROI and other benefits of your company will need to compete and exceed that of all other companies in the investor’s portfolio. This can help laser in on your firm’s unique value proposition and messaging.
100x is a Myth
The media glamorizes VCs and investors due to their 100x returns. Investors will perpetuate this to some degree by reminding entrepreneurs of their 100x hit. How many deals did it take to get there? How many years to get the 100x exit? Say an investor invests in 10 deals year 1 for $100,000 and then in year 10, gets a 100x (or $10 million) payout. It’s easy to say 100x return — when really, it’s closer to 10x (assume the other 9 deals went to 0 — not uncommon). So, $1 million became $10 million. Still, not bad. Break it down to annual returns? At a high-level, closer to 25%-26% per year. Still fantastic compared to normal market rates of return, but 25% is way less than 10,000%. So what happened? VCs and investors have their targets to make to satisfy their partners and their personal financial futures. Understanding what acceptable levels of a return for a VC fund or an angel investor can help entrepreneurs stay focused on real business growth. Yes, all investors want 100x growth, but 0.25x-0.5x per year will be well received and is often more manageable to achieve.
They Slow Down in the Summer Time
“Sell in May and Go Away” is not just for the public markets — it applies to nearly all types of business in the financial services sector, including VC firms and angel investing groups. Some of these firms even have ‘summer hours’ with early office closing times. As an entrepreneur, what does this mean for you? It means that if you are desperate for funding, it’s best to have the deal wrapped up April — or else it’s likely going to be put on hold until October or November or even the following year. Plan your outreach accordingly — if Tax Day is when you get the bug to start reaching out to investors, your summer may be better spent working on your business to make it more fundable come the fall. Or, use the time leading up into the summer to make an introduction to the business, without asking for a fund-raising session, and let the investor know you have an important, effective venture in the works and will reach out to them in October to share results.
Their Definition of Traction Constantly Changes
Traction and product-market fit are words that frequently emerge from the mouths of entrepreneurs and investors alike. The challenge is — nobody can really seem to agree with what they mean. Here are a few real exchanges (source: me) that have taken place. Got your own story? Send it to me!
If only we had 10 orders…
CEO: If we can just get to 10 orders a day, we will be crushing it.
(fast forward 6 months and yes, the 10 order threshold was breached)
CEO: If we don’t do 1,000 orders today, we will be out of business
Nobody uses it…
VC: You need traction — the problem with your product, nobody is using it or will use it
Me: We had 2,000 users yesterday
VC: Well, it doesn’t count unless you get to 25,000 users
Me: Fair enough
The reality is, nobody can really define ‘traction.’ To an investor, traction is a sale at a large multiple to their initial cash investment. That’s it. What can you do as an entrepreneur? Continue to operate and grow the business. Take traction advice and movement of these goals as inspiration for pivots and improvements rather than directives. The VC expects the entrepreneur to be the business expert and operations master and ultimately, strong growth in user bases, revenues and profits will make it very likely that ‘traction’ in the form of a liquidity event will take place.
Inigo Monoya said it best. https://www.youtube.com/watch?v=G2y8Sx4B2Sk
Their Timelines are Much Shorter Than They Tell You
VCs and investors often talk in terms of multi-year plans. Part of it is their job — to be a successful investor, one must look years into the future and determine what the next trend will be. 2 of the smartest and successful early stage investors I know are masters at looking into the future. In both cases, they both proposed projects that needed immediate attention. At the time, the purpose was unclear. Fast forward 5–10 years to today, anyone that applied those suggestions is rich or well on their way.
So, the investor may understand and say a 3–5 year timeframe, but they really want results within months. When an initial check is written that covers 2 years of burn rate, the VC knows it will be gone in 6–12 months. Entrepreneurs must move fast — and recognize that the timelines suggested are far shorter than what has been proposed. This is because the investor already knows that the money is going out the door fast and it’s just a matter of time before bigger, better competition may emerge. There is no need to make rash, rushed decisions that result in ill-fated mistakes — just recognize that it’s time to accelerate. Already working 60 hours a week? Prepare for 70 or more just to keep up the pace.
They Get Scared, Too
At the end of the day, VCs and investors are people. It can be easy to think of them as titans of industry or these fearless commanders. Much of those accolades are deserved, but at the end of the day, even for billionaires, $1 million is a lot to lose. They want to win — they want to be right. And at some point, during a start-up’s growth, it’s going to look awfully clear that losing is the only outcome. When things are tough, entrepreneurs must recognize that some of an investor’s advice is coming from a place of fear rather than a place of strength. This is where the first item about having open lines of communication and a genuine, mutually respectful business relationship will work wonders to address fearful banter and replace it with effective advice.
A Few Things VCs and Investors Want You to Know, But Won’t Tell You was originally published in Terence Channon on Medium, where people are continuing the conversation by highlighting and responding to this story.