How to Out-think Investors and Raise Your Seed Round
When we talk about raising seed investment, we are mostly talking about raising in the region of £150k-£350k from angel investors - perhaps as a first raise or perhaps after raising a pre-seed round from friends and family.
So, when you are raising investment from angels you need to understand the investor mindset. Too many people treat investors as ‘wealthy customers’ and don’t get into the psychographics of the investor, the mindsets behind them, and the decision drivers that are at work when they consider making an investment.
In this article we will consider:
1. Investor psychographics
2. The psychological drivers underlying investment decisions
So, why do angels invest? According to Bill Morrow, one of the founders of Angel’s Den and a man whose seen more of the UK angel investment landscape than almost anyone, the top reasons are:
1. I’m bored
2. I want to give something back
3. The money
4. Give me something interesting to talk about
Does it surprise you that money isn’t #1? It did me when I first heard it. But if you think about it, they already have money, and if money was their primary concern then property is a much safer bet.
The reality is that a lot of angels get bored. Being retired seems great but there’s only so much golf or tennis you can play. On average it takes less than two years before they realise it’s all a bit dull. But what can they do? They’re not crazy enough to to start a venture of their own, but if they find someone doing something interesting where there is an alignment of values - well, being an investor can make a lot of sense!
In London, many angels will have made money through property or finance. They may be angel investors but by no means are angelic. Investing in companies with a good mission is a way to give something back. Further, they may feel they have useful skills and experience and being able to mentor is another opportunity to give something back.
And then there’s money. As we’ve already discussed, money is not the primary reason to invest and it’s worth bearing in mind that serious angels are already wealthy; their relationship with money isn’t necessarily that of you or I. They’re not philanthropists, so they want financial success but they accept this may not happen. What they don’t want to see is their money being squandered foolishly.
So, having established some of the psychographics of the angel investor, let’s turn to the decision model for investing in any given business. Most investors are operating with three concerns in mind:
1. Value potential of the opportunity
2. Risk of wasting their money
1. Some entrepreneurs make the mistake of thinking of investors as ‘big customers’. This can be the case but it’s rare. It’s not even likely that they will be interested in/knowledgeable about your space - you will need to persuade them. It seems obvious when you write it down, but I see a lot of people assume the investor will already be interested and it can doom them. You also need to persuade them that the opportunity your business represents has sufficient value to help drive their portfolio.
2. Angel investors may be wealthy but they also know that you don’t stay that way by investing foolishly. No investor wants to put their money into something daft. They want results - not a beautiful office of beanbags and exotic plants.
You need to spend on what you think is right, but it is key to prove to potential investors that you are a responsible custodian of their money and that you make good use of it. A great way of demonstrating this is through investing money in your own company. Angel investors like this. By putting your money where you mouth is, you show the investors that you are spending funds as precious to you as they are to them.
Now think about how you can demonstrate that you have been a wise and successful custodian of the money you’ve raised to date. What milestones did you predict and hit? How have you de-risked your project? What advantages have you created? And how you can present these to best advantage in front of a sceptical ex-accountant with £25k to give you.
3. The third factor you have to play upon is their fear of missing out. All investors face the fear of missing out on something good and this is largely because most investor business models are predicated on needing one or two break-out hits to make their portfolio return numbers work. An investors ability to predict the future is probably no better than average - this is a problem. And the fear of missing out is not only financial - ego comes into it too, of course.
It is therefore imperative that you are able to show how not investing in you will feed that fear. You need to articulate how your business model will exploit trends that can be credibly argued to be moving in a direction that will generate success for you.
A reliable model for understanding how to think about this is Rowan Gibson’s 4 Lenses of Innovation. I plan to cover this in more detail later, but in brief the lenses are:
Understanding customer needs
Using a model like this, you can create a position in which the investor faces a risk of missing out on something good. Although investors do suffer from FOMO - good investors will still take a long-term view.
Your job, when thinking about things like a pitch deck or an executive summary, is to understand the investor mindset and balance the 3 forces to create something compelling.
What’s are your thoughts and experiences in raising investment? Feel free to comment below.
My special thanks to Bill Morrow for his help in refreshing my memory on some important points that really improved this post. All the mistakes… totally mine.