How to speak to investors and get funded
Sigma School
18th August 2023
The best way to convince someone to give you money is by showing them how excited you are about it.
Some time ago, I was having dinner with friends at their house. Before the meal, I had suggested a toast, and in typical geek fashion, I had pulled my laptop out and set it on the table.
"So what?" said my friend, "what are you going to do about that?"
"I'm writing a business plan," I said.
"Really," said my friend, "that's a great idea."
I skipped the speech. I had been working on a business plan for a science experiment for years, and I knew it was solid. But I had been afraid to show it to people. If they liked the project so much, they might want to take part. And if that happened, I might need to pull together the financial resources before I had a chance to build and test the kit.
But with the business plan on the table, my fear vanished.
I didn't have to tell anyone about my plan. They just read the details and said, "That's a great idea."
My project had potential.
That was enough.
The business plan was backable.
"So tell me more," they said.
"OK," I said, "I can make a lot of money selling kits to schools, and I can also sell kits to museums.
But I want to make more money. I want to sell kits to customers around the world, and I also want to sell kits to private customers who want to do their own experiments."
"So," asked my friend, "what are you selling?"
I told her “i’m selling the human spirit of exploration and discovery”
My friend’s eyes widened, sat back in her chair and just processed it. After a few moments, she proceeded to tell me it’s the craziest idea she’s ever heard, but she said, “I’m excited, so let's do this thing. What do you need?”
Investors invest in order to make money. Of course, some of them do it for intellectual reasons that are just as important to them. But the ones who do it for money do it because they have to, because they lack the money themselves. The most successful investors are the ones who know that if they don't make money, they won't get funded.
Investors are people, too, so it's in their interest to make the right kind of deals with you. If they like you, they will like you back. If they like you back, they will be more willing to share the risks of backing your vision.
There are two things you have to pay attention to when talking to investors. First, you have to show them that you understand what they are concerned about. Second, you have to show them that you understand their concerns. To do that, you need to know something about them.
Investors are people too, and they have their own way of looking at the world. That's why it's important to be yourself. You have to speak their language.
Investors like to know what to expect. They want to know that if they give you money, you will give regular reports about how things are progressing. They want to know what they should ask for if they ever get to see you again.
Investors don't like surprises. They don't like surprises in business, in personal relationships, and in life in general.
The first question an investor asks is, "How much money does your business make?" This seems like a very simple question. It isn't.
The first part of the investor's question is important: it asks whether your business is making money. The second part is important: it asks where the money comes from.
Investors don't ask this question to be difficult. In fact, most entrepreneurs do a pretty good job of answering the first part. They say their business makes $5 million per year. But is it profitable?
Even if it is profitable, does it make enough money? How much money you need to make depends a lot on where you live. In New York City, where land is very expensive and the competition for talent is fierce, you need to earn at least < million per year to be worth investing in. In Silicon Valley, which has plenty of land, you can probably earn $25 million and still be worth investing in.
But it doesn't matter where you live. What matters is whether your business makes enough money. And what this means is the question: where is your business making money?
The answer to this question is the business' "driver." A driver is the thing that makes your business grow. It can be your product, your distribution system, or your service. It doesn't matter which. What matters is your business' driver.
Of course, if your business doesn't have a driver, you can't make money. So your business needs a driver. It doesn't need to be one you've thought of. In fact, most successful businesses don't have drivers that are obvious. The businesses that made Microsoft, Apple, and Google all had drivers that in the eyes of their competitors were crazy.
Apple's driver was selling computers to universities. Microsoft's driver was selling software. Google's driver was selling search results and ads.
Everyone needs a driver in order for investors to feel confident in the business.
An entrepreneur's job is to put himself in this position: The investor wants to own a piece of the company; the entrepreneur wants control of the company. The investor will demand his returns with the expectation that the entrepreneur will bend to his will. The entrepreneur must figure out how to push back on the investor.
If an entrepreneur can't push back, the investor will control the company. That's why entrepreneurs think of investors as partners.
And this is why entrepreneurs have to be good listeners.
In Silicon Valley, when people starting companies ask each other for funding, they sometimes say, "How much money do we need?" That question, while polite, is meaningless. Companies need money for many reasons, and asking "how much" is like asking "how long."
Investors see through that question too. They know how much funding you need, but they don't know anything else about you. They don't know about your background, your education, or your expertise. They don't know about your failure rate or your record of failure. They don't know about your hopes and dreams or your fears.
So don't ask investors "how much?" Instead, tell them why you started your company. Tell them why you believe in your idea. Tell them about all the people you know who already use your product, and tell them why those people like it.
Tell investors how you are going to make money, even if you can't yet. Sell them on your track record. "We have been developing this product for 30 years," you might say. "We know our customers, and we know how to make customers happy. We have an experienced management team, and a good track record. We are passionate about the problem we are solving." Investors are smart, so give them a reason to trust you. Don't lie, and don't exaggerate, but don't leave anything out either. Investors will be impressed by your passion, and they'll be much more willing to fund your company.
Read more about our other blogs on the required skills for entrepreneur here.
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