Monday 3 July 2023

Pitching in the shoes of the investor

This article originally appeared on the Matū website.

One of the biggest challenges for founders is the pitch – going to investors and asking for money. A lot of pitching resources tell you what you should present to investors – the pain point, the potential solution, why it will work commercially, the team that will deliver the solution, and how more money would help the team do that faster. 

But most guides don’t tell you what the investor is thinking about, what’s on their mind as they’re (hopefully) listening to you. If a founder can understand the context of the investor, then that should inform how the pitch is presented, and could increase the likelihood of developing a connection and relationship with investors.

So what is the investor thinking about when they take a pitch? Every investor is a bit different, but based on my 5+ years in the industry, here are some of the pressures they might not tell you about:

  • I see a lot of pitches and I don’t have a lot of time. A professional investor (i.e. fund managers rather than angel investors) will see a couple hundred pitches a year depending on where they work. I will probably aim to invest in 3-5 companies a year. Some investors are looking for quick declines so they can move on to the next one. What are the reasons to say no, but in a nice way?
  • I have limited funds to deploy. Every investor only has so much money they can invest, but the constraints you might read about in Silicon Valley are 10x tighter in New Zealand. There is less room for error, less appetite for gambling – so every pick has to be a good one. Does this opportunity meet our highly selective thresholds? Can I deploy enough into this investment round to get a meaningful stake without compromising portfolio diversification? Do we actually have enough money to make this investment and potentially make follow-on investments?
  • We have an investment mandate for a reason. Generally it comes down to what a fund has promised their investors the limits on investment will be. But many of the rules are there to mitigate failure risk as well, such as funds not allowing a single company or companies at a certain stage to be more than a certain percentage of their portfolio. More and more investors are caring about the impact and ethical implications of their investments too, but still expecting market-level financial returns. Does this opportunity fit the values and investment mandate of our fund?
  • Things can go very bad if I lose other people’s money. While some professional investors are using their own funds (or have significant holdings in their funds), most fund managers are investing on behalf of others. So what are the key risks of failure here and am I confident that they can be mitigated enough? Even if there is no financial consequence to the individual investor for making a bad choice, the fear of being judged poorly can be very powerful. Fund managers also have to pitch to investors to get capital for their funds, so they also have to meet milestones and deliver on what they promised. Will I be embarrassed (or fired) because others might say I took an unacceptable level of risk on this investment?
  • I have to convince an investment committee (or before that, my boss in the firm). Even if I really like an opportunity, most funds don’t let one person make investment decisions by themselves. We have teams because we all have blind spots, and if we work together we make higher quality decisions. The consequence is that I have to take what the founder is telling me and synthesise that into a narrative in my own head about why this is good for the fund. Some funds get the founders to present to the investment committee, but at the end of the day the internal champion/lead on the deal has to stand up and defend any recommendation to invest to the rest of their team – do I think I can do that here?
  • I know other investors in the ecosystem have already seen this opportunity. Humans are social animals and word of mouth is an important contributor to our thinking processes. Maybe the other investors are wrong or we see something that they don’t. But if lots of others have said no (or yes) then we should try to understand why to reduce the likelihood that we’re making an obvious mistake.
  • There’s more and more competition in the investment ecosystem, and other people in the fund (or our investors) might be mad if I pass on what turns out to be a good investment. While the current market conditions suggest that terms are leaning towards investor-friendly rather than founder-friendly, there are always going to be some opportunities that are just obviously very good. Multiple investors will want to be leading that investment round. What can I do to create an unfair advantage to win the deal? That might be moving faster to get an offer / term sheet to the company, or looking for ways to build more of a personal connection with the founders, or promising high-value connections. This is generally done in good faith but sometimes it doesn’t work out.
  • Do I like these founders? There is a lot to be said about getting good or bad vibes during a pitch, and sometimes you just have a personality clash. A fund that is very conservative and serious may not like “hype hype” founders who focus on style over substance, while confidence and charisma may be seen as strengths by funds more closely inspired by Silicon Valley. But if an investment is made, someone in the fund is going to have to engage with the founders on a regular basis in a long-term relationship, and it would help if we got along. We often refer to this as “alignment”. It only takes a few minutes (or seconds) for an investor to get a sense of whether they will like someone or not – human brains naturally look to identify in-groups and out-groups.

This is all in addition to what investors are supposed to think about of course, like “is the market big enough” and “what does the cap table look like”. But it’s helpful to remember that investors are humans too, you aren’t pitching to a robot or an immovable process. While investors may be following mental models of what makes a good investment, they face pressures that influence their thinking (consciously or subconsciously) too, and if you can recognise that you can better understand what is in your control and what is not. You can deliver the same pitch to the same investor on two different days, and get a very different response just because the investor is having a good or bad day. That’s not your fault as a founder.

So what can you (as a founder) do about this? 

  • Do your research on the investors you’re pitching to – check what their past investments have been, see if they have any writing that gives you a sense of their value set and ideology. 
  • Don’t assume that all investors think the same – be prepared to tweak your “standard” pitch deck to emphasise things that might appeal to a particular investor. 
  • Overcome the information asymmetry that inherently disadvantages you relative to the investor – they see hundreds of pitches, you only give one – talk to other founders about their experiences and which investors they value and rate. 
  • Give yourself as many shots on goal as possible – pitch to lots of investors even though it’s more work, and even if someone says no, ask if you can keep in touch and maybe present again when you’ve made more progress. 
  • Build social capital with investors – an investment is not just a transaction, it is a relationship that ideally goes on for many years, including before investment.

And, if you want a second (or third, or fourth) opinion, here’s what a bunch of other local investors and ecosystem supporters have to say about pitching and investment processes:

Thank you to colleagues Kiri Lenagh-Glue, Maria-Jose Alvarez (WNT Ventures), and Mitali Purohit (Nuance Connected Capital) for reviewing this article and providing feedback.

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