Make Investors Sit Up and Notice #4 - How to Get Out of Investor Hell
A colleague who runs a very successful software company once told me that he plans for incompetence because most people are incompetent. Pushed for an explanation of this interesting viewpoint he said that it's because of how fast the world moves today.
People are generally doing their best, but what we must accomplish daily and all the things that could go wrong are magnified by the speed at which business now moves. More things go wrong at higher speeds and damage worse at higher speeds. Hence, incompetence that in times past might be less likely or cause less damage might be devastating in today's fast paced world.
So he plans for inevitable failure by taking great pains to have people, systems, and practices in place to minimize damage from errors. He plans for failure and sets his business up to minimize the damage that is generally unavoidable. And, as he tells it, he's pleasantly surprised when everything goes smoothly.
By the way, he is an experienced and savvy investor, too. So far as I've seen, he rarely loses money. What's he doing that other investors don't and what can we learn from it as entrepreneurs.
Do you suppose he carries the same view about his investments as he does his own business?
Of course, and so does most experienced investors. They know that problems will inevitably occur. They know that incompetence is waiting around every corner and they know that it could be catastrophic. Unlike my colleague, most investors don't really know how to mitigate this risk. You can teach them.
Put yourself in their shoes. I mean really do it. If you expect someone to put their money into your company you need to understand their concerns and real fears. If you've been reading this series you already know that initially, most investors view you as a tremendous risk - a pickpocket out to separate them from their hard-earned money. Like the Delta's in the movie "Animal House," you're on double-secret probation. One false move and you're out. Now you're learning that they don't just view you as a pickpocket, but as an incompetent, or at least the leader of a team that will inevitably demonstrate its' incompetence. I may be exaggerating for effect, but you get the idea.
They do want to trust you. You have to show them how.
And if they trust you and you let them down they'll be humiliated and thought a fool for having trusted you in the first place.
It's a bleak picture. But take heart. Think like Winston Churchill, who once quipped "when you're going through hell . . . keep going."
So let's keep going.
I promise we'll get you out of investor hell and into the land of milk and honey if you bear with me now. But to get there you'll need to think like an investor. On his or her side of things, there is a large chance to lose and a small chance to win. And consider that they don't need to take on the risk that your opportunity represents. Generally, they're happy enough and successful enough already. Just recognize that.
Now, all that being said they've agreed to take a meeting with you . . . so there must something they're interested in.
Can you guess what it is?
In my experience it is one (or two, three or four) of the following:
- They love the excitement of the game and think your game may be worth playing
- They want to leave a legacy and think your opportunity may contribute to that
- They know your industry and think you have a true edge that they could help you capitalize on
- They like to gamble and are hoping to find the next facebook or google.
Above all these reasons, someone probably recommended you to them.
Certainly, there could be other motivations but the four listed above cover most of the scenarios that play out between investors and entrepreneurs. The thing to understand is that if you got the meeting they like your business for a reason, AND you've been recommended, BUT (and just please "get" this) you still represent a huge risk to them.
Your job is:
- To really understand that you represent mostly risk and just a small chance of success (and forget about the idea that your particular idea, plan, concept, market, etc. is that one big winner because they've heard that so many times they can't hear you when you make that claim)
- To NOT do what everyone else does -- the others will keep touting their plan, their idea, their market, their ROI, to the exclusion of everything else -- you will not do that (if you want to win)
- To DO what only a few do -- acknowledge the huge risk the investor is taking even considering putting time, money and reputation into your business -- and start your relationship by deepening trust (as explained in my previous blogs). . . AND
- Tell them . . . gulp . . . that you recognize your business is a big risk to them, that you do not have all the answers, that you don't just want their money, but their wisdom and experience as well, and that you have brought in an execution master(s) whose entire job is to anticipate what could go wrong and be able to manage and rally your team to minimize collateral damage when something does go wrong.
Ahh yes . . . the execution master again. Gene Kranz, George Patton, Sheryl Sandberg, Steve Ballmer . . .
You're going to standout in the crowd because you're going to understand that risk mitigation is of utmost importance to investors who understand that most people are incompetent because of the speed and complexity of business today. You're going to be the one that understands that people, plans and systems will encounter problems. You're going to be the one that has a modicum of humility -- realizing that you don't have all the answers -- and a skill for finding and retaining high-quality team members -- the kind of people who spend their days managing problems and their nights worrying about the next one that will arise.
You're going to be that 1 in 1,000 visionary entrepreneurs that "tied rocks to clouds."
I love that phrase because it captures the essence of exactly what you need to do in order for an investor to trust that you understand risk and have taken steps to minimize the collateral damage. You are the visionary leader. Show investors that you had the humility and the courage to tie your visions and immense energy and creativity to a rock - the execution master that has the skills and mindset to ground your vision in the world, protect it with their life and see it blossom and grow.
Here is what is likely to happen in an investor meeting if you demonstrate that you've tied rocks to clouds. First, you'll find that your investor now has the mental space to really hear your ideas, your goals, your secret sauce and your financial prospects -- because you've addressed their greatest fear. Second, you'll find that your investor will begin to focus on the upside potential, versus only the downside risk -- because you've acknowledged that you don't know everything, but you've brought in people (or a person) whose entire focus is on risk mitigation. Third, you'll find that even if he or she still views you and your company as a pickpocket, for now, they'll view you as one they could potentially work with, versus one they want to run from -- because you've understood that if your deal goes bad their reputation and pocketbook with take a hit and you've acknowledged that and taken steps to mitigate the downside loss.
The point to all of this is that investors don't expect you to take all risk out of the equation. In fact, if you do say you've taken all risk out of the equation they'll run away very quickly. Because they know that's not possible and will think you a fool or a narcissist for thinking it is. What they want to hear is that you know there is risk, you know things will not always go as planned, you know you don't have all the answers and you've brought in an execution master to think about all that could go wrong, every day, so as to mitigate the risk of disaster.
Come from that place and you'll stand out like a gold star among a lot of bronze ones.
I believe from personal experience and conversations with dozens of investors that you have to 1) take steps to mitigate risk by bringing in one more execution master(s) or planning to do it, and 2) turning the investor's attention to the fact that you do this. If you spend 40% or more of your time with each investor teaching them what you are doing to mitigate risk of disaster, you have a much better chance of making them sit up and listen.
Key takeaways: To investors, you represent not only a potential pickpocket or charlatan, but also a huge downside risk with only a slice of upside potential. Given that, if you want to stand out from the crowd focus on what they're focused on! Acknowledge the risk. Acknowledge that you understand if they invest and you and your team lose the investor could be branded a fool and lose his or her money. Show them that the downside risk is something you have taken seriously by bringing in a qualified execution master to tie rocks to clouds -- to spend their days and nights focused on what could go wrong and how to minimize the collateral damage. Not only do you have to mitigate risk by adding an execution master to your team, but you have to teach the investor that you're doing this and why.