Five Ways You’re Not Going To Get An Investor For Your Startup
Thursday is guest post day here at Duct Tape Marketing and today’s guest is Weston Bergmann – Enjoy!
There are a lot of ways to attract an angel investor to your startup. There are even more ways to turn them off. These are some of them.
1. Not Having Traction
Sophisticated investors invest in companies that are ready to scale. Meaning the founders have proven on some level that people will pay for what they’re selling and they’ve proven they can repeat said process. The investment dollars are meant to extrapolate on this proven traction. If you’re asking for dollars and you have no traction, what you’re really saying is you want investors to gamble on your experiments.
2. Not Knowing Your Cost Of Customer Acquisition
Knowing how much it costs to acquire a customer is debatably the most important variable in an investor’s equation. Here’s a simple example, if you know how much it costs to acquire 100 customers…. than investors can use this equation:
Cost of getting 100 customers = X
Revenue from 100 customers = Y
Amount of money investor is willing to invest = Z
(Y minus X) times Z = total profit
Z divided by X = amount of customers
Now the investor can ask himself or herself if the amount of new customers and their profit is a big enough splash to get them to that next level. That next level could be something like organic growth possibilities, a larger round, an acquisition target, etc. If it’s not big enough you’re either not asking for enough money (red flag) or your cost of customer acquisition is too high (bigger red flag).
3. Having a Weak Team
Every investor says the same thing: bet on the jockey, not the horse. They’re looking for a “wow factor” that stands out from the crowd. Think about it…if you don’t stand out, how can you create something else that does? There are a lot of attributes that defines an entrepreneur’s “wow factor.” You don’t need all of these, but it’d be nice:
-Out-of-this-world storytelling ability
-Previously failed startup
-Extremely successful previous startup
-Personal money invested
-Ability to build your own product
-Connected (social media, rolodex, leadership roles)
-Back story that stands out (Olympian, celebrity, star athlete, successful author, etc.)
4. Being Unlikable
If you’re about to take a bunch of money from someone to go off and change the world you’re solidifying a relationship with that person for the long-run. No one wants to work with someone that’s not fun, isn’t likable, isn’t agreeable, and isn’t at least a little cool. If you’re thinking, “wow, this isn’t me at all,” it’s your responsibility to find someone that is and make them the face of your company. Yes, this is sometimes called politics. Deal with it or fund the company yourself.
5. Not Being Honest
There are two major reasons why you want to be honest. The first is it adds credibility. If you don’t say the answer “I don’t know” at least once in a long Q & A session you’re not going to get funded. Investors are going to ping you with hundreds of questions until you’re blue in the face, and they’re purposely going to ask you at least one question there is no answer to. They’re testing you to see if you have the confidence to tell them you don’t know. Obviously you can’t say, “I don’t know” too much, or that looks bad for a different reason. But once-or-twice adds a lot of credibility to the rest of the questions that you did answer.
The second reason why honesty is important is something called fraudulent inducement. It means that if an investor can prove you lied to them about anything during the pitch and due-diligence stage – they’re entitled to 100% of that money back. Trust me, you will have already spent some of it (if not all of it) by the time they want it back. The best way to not get caught lying to an investor…surprise, surprise…don’t lie at all. Ever.
Weston Bergmann is the founder and lead investor in a business incubator in Kansas City called BetaBlox. He’s acquired part of over 60 startups in the last two years alone. He is a radical practitioner of lean methodologies and an honors graduate from the W.P. Carey School of Business at Arizona State University. He’s lived in ten different countries and his dog’s name is Bootstrap.