Why Do You Want To Invest?
Earlier this week, my partner Brad and I were visiting with one of our largest investors. We try to see each of our institutional investors in their office at least once a year. It allows them to talk to us candidly without any other investors in the room.
We had a nice visit and near the end of the meeting Brad asked the investor "why did you decide to invest in our fund?" The investor explained his rationale and it was really helpful to me and Brad to understand what he saw in us and our fund over three years ago when he made the commitment to invest.
When you are raising money, it’s hard to ask that question. You need the money to build your business and it’s not the most natural thing to stop selling and say "exactly why do you want to invest in our business?"
But I encourage everyone who is raising money, both VCs and entrepreneurs, to do exactly that. It really matters why someone is investing.
I know a lot of investors who invest in something because they "need a play in that market sector" or because "they like to follow xyz investors in deals" or because "it’s a hot company, we’ll make a lot of money on this one".
To my mind, those are not great reasons to have someone invest in your company. When things go awry, and they always do, those kind of investors are not likely to hunker down with you and figure out how to solve whatever problems you are facing.
I believe that we should all seek out investors who understand exactly what we are doing and why we are doing it. We should seek out investors who share our passion for our businesses. And we should seek out investors who have reasons other than pure financial gain to be invested in our businesses.
If someone said to me, "I want to invest because I agree with your investment thesis, I want to learn more about the kinds of companies you invest in, and because I personally enjoy the time I spend with you and would like to do more of that", that’s the kind of investor I’d be excited about.
It’s frankly hard work to find investors who can answer the "why do you want to invest" question in a way that gives you comfort. But it’s worth working hard to find them. Because when you do, you will create a much stronger partnership than the average investor/entrepreneur relationsip.
Amen, Fred. I feel that this is becoming increasingly more important, particularly for entrepreneurs.
Uhhhhhhh, to make money? Yeah, money, right, to make money.
Even more useful is to find out why someone doesn’t invest. Fred’s post brings that back for me since he did one of the best jobs in the early days of Miningco/About of making me question ourselves. I’ll always go back to a guy like Fred who gives a fast no… and tells you why. It’s harder to get someone to tell what they don’t like about what you’re up to than what they like. They either don’t want to put it in words or don’t know how to. Fred always made us better by telling it the way he saw it.
but that’s hard to scale Scott.these days when we get 20-30 deals a week coming in, i don’t know how to tell each and every entrepreneur what i don’t like about their deal.i try as hard as i can, but i feel like it’s getting worse, not betterfred
2+2=5shouldnt that be the general formula for added value excluding money?
including money, rather.
Dear Fred,I’ve been reading your blog ever since pmarca referenced you a couple of months ago, and I’m glad I clicked across. I very much appreciate that you share your thoughts with everyone.Not sure if it’s legal to ask you long and rambling questions on one of your comment boards, but I’ll go ahead and do it and see what happens.I don’t really know much at all about the venture capital world, but, when I first found out about your blog, our Beijing-based startup office was crawling with investment bankers looking to sell us to VC, so a couple of those of us not intimately involved in the fundraising aspects of things got curious and started trying to learn what we could (from pmarca, etc.). It’s been piecemeal learning, but it’s been fun.Your post above about your relationships with your investors has me wondering about venture capital firms’ relationships with the startups in which you invest. Specifically, I’m curious to know how close the relationships get and when and why, if ever, you guys get heavy into day to day operations at startups.I’ve read pmarca’s series on venture capital, and he certainly provides lots of great answers to my questions, but since you made the post that has me thinking about this stuff again, I’ll throw this question at you and see if you might have some thoughts:Do you guys ever send “tentacles” out to spend time working with the startups in which you’ve already invested? I guess calling them “tentacles” might be a bit over the top, but do you have junior people at your firms that you send off to help with particular projects or gather info for you or maybe act as direct lines back to the general partners?If you do, do you think they’re effective?If you don’t, why not? I guess it just strikes me as a potentially useful little thing to do. But maybe there’s some obvious reason it wouldn’t work. It’s too expensive to hire tentacles? You don’t want to meddle too much with the startups? I mean no question about it some startup teams would be terrified of tentacles, but wouldn’t some entrepreneurs (people that have relationships to you guys that parallel your relationship to the institutional investor from your post) see them as opportunities and resources: easy access to a VC firm’s braintrust? If nothing else they could be seen as free/cheap labor (depending on the structure of the arrangements, to whom the tentacles report, how they are managed, etc.), right?So there you go. If you get inspired, I’d love to hear your thoughts.Take care, and thanks again for the blog!Jake
I wouldn’t actually consider it “selling” unless you ask the question “why” and are happy that someone is spending their money for the right reason. It sounds like you might confuse selling with pitching.
Strange enough I want exactly the opposite : an investor that focus only on probable return on his money and on entrepreneur’s skills/project …. but VC/Angels in the end always put money because you’re a “friend of”, “you are positive and smiling” … what incompetent scumbags !!!
Become my partner and I promise yoy will make 50% return in a 2 year period. I can offer security by assigning one-half of an interest in a real estate property I have under contract. Call me at 770-427-7775 or contact me at [email protected] to furnish references an documents. Maybe a trip to visit me is in order. Thanks,Larry Hogue