How does a successful investor / VC thinks and acts before investing?

A startup journey can be the most rewarding and challenging for founders and one that one must spend learning, growing and enjoying…

March 21, 2022

A startup journey can be the most rewarding and challenging for founders and one that one must spend learning, growing and enjoying. In this journey, from idea to growth stage, founders come across the need to approach investors, from capital investment needs to advisory, resource and strategic investments. One of the most important questions founders finds themselves asking is …
‘’How do I approach this investor?”

One of the best ways to answer this question is by first understanding ‘’how do smart investors think?”. How investors think can help founders prepare to approach them with the right mindset and information.
Investors through years of success of being in the business world, most likely in building businesses, understand the fundamentals for success. Therefore, when they look into new startup investing, they look for these fundamentals in place and/or the possibility of incorporating them. So what are these fundamentals?

Founder(s) – Who are they?

Your startup starts with you, who are you, why did you want to build this startup, your inspiration, passion, prior experience and vision. Is this your first startup? Have you had prior startup experience, as a founder or an employee? Have you failed before? How committed are you to the success of this startup? Do you have another full-time job?
These are all very important questions because they are all about you and gives the investor an idea of what they are looking for in the person who will be running the business where they invest.

Let’s look at some of those questions in detail to understand what the investors are thinking of when they ask them.
For an instant, is this founder a first-time founder or not? Has he/she failed before?
This is a very important question. Because this question immediately gives the founder a sense of confidence of the founder. If the founder is not a first-time founder, had done many startups before, with some failures in the profile, this is good news. Why? Because it means that the founder is not afraid of failing and has the quality to dust themselves off and start all over again.
Building a startup is hard, so your ability to learn from failures and try again is a very important factor in your success. In the startups’ community, there is a saying’ Fail often and Fail fast!’. The more your ability to do this and look at what worked and didn’t work and keep improving and progressing is key to success.
This also means that you as a founder is not afraid to change your ideas to reach success, because investors know that while you may have started on a particular idea, depending on the market demand and response, you need to have the capability to pivot without being too emotional or personal.
Another reason that this question is important is if you happen to be a first-time founder, you may not have the experience to know these aspects of a startup. Then the investors might look at performing an advisory role or suggest getting an advisor on board, that can help mitigate any problems the founder may encounter going forward.
The question on commitment – where is yours? This is also an important question. Investors know that at the initial stages of building a startup, founders may not make enough revenue to pay them a salary. Depending on the startup, this phase will continue for a long time. Therefore, it is natural that some founders try to keep their day job going until the startup is a success.
Having said that, if the founder is spending the majority of their time on their day job and the startup is only a side hustle, this may be a big red flag. Investors want to see results fast, which will only come to be if the founder is working hard to achieve it. So, being open about your commitment to the startup and its success can be a deal-breaker for investors.

The team is CRUCIAL!

As the startup grows, you as a founder will put together a team to take it forward. The members of the team play a big role in its success. Of course, it’s mainly due to their experience levels and what value they bring to the startup, but its also about their commitment and attitude to succeed.
If the team onboard, only considers their contribution to the startup as part of a job, then it might not bring out the results needed. Even as a startup employee, your team members must show absolute commitment and ownership of not only their role but to the success of the startup. They must not be afraid to get their hands dirty and do the work, that needs to be done, ask the questions that others are not asking and challenge and push to ensure success. Sometimes, founders themselves can’t lift all that load, hence a good team plays a key part in this contribution.
Startup companies need to have the culture of everyone, playing a leadership role, regardless of their titles. This allows the members to be proud of what they do. It must also embody that culture that if the startup succeeds, we all succeed in both spirit and action.
Only if you have a committed and goal-oriented team, will the startup be able to product or service that consumers want.

Is the Idea/Tech working?

With a committed and passionate team, a startup will be able to build a viable product or service. This may be in an MVP stage, but it should cover the basic concepts and address the crucial pain points. Your investors will want to see how the MVP works, how it benefits the consumers. Therefore, you must be able to demonstrate this both in your concept model and in your working product.
Another important area is the IP rights for the product/service, which investors expect the founder to have considered and obtained, prior to approaching them. Most likely, if the founder has not gone the IP rights for their product/service, the investment will be on the condition of obtaining one.

Can this idea/ product be converted to a business?

This is a crucial question. Most of the time founders spend too much time perfecting their product and/or technology stack and spend little time considering a viable business model. It’s great to have a perfect product, but if that product cannot be converted to a business that can address as a solution to a common problem, then it will die before it even starts.
Coming up with a viable business model and considering how it can be scaled to ideally reach a larger market are important areas for investors when making the decision to put in their money. If you haven’t thought of it yet as a founder, make sure you think these things through before approaching an investor, because these are questions that investors are sure to ask. They would want to see that you have thought it through and have, even if not a perfect plan, a base plan that can be improved over time.

Knowing ‘how to think like an investor’, is part of a founder’s learning and the more investor pitches were done, the more you will know how investors think, why they think this way and how to appreciate the value the investor brings to the success of your business.