Paul Graham: How to convince investors
August 2013
(This is one of two fundraising essays. The next one on fundraising tactics will be released soon.)
Weightlifting injuries usually occur when people tighten their back muscles instead of their leg muscles. Inexperienced founders make a similar mistake when trying to convince investors with their pitch. Most of them would benefit if the startup itself spoke for itself, if they started by trying to understand why it would make sense to invest in their startup, and then they would simply explain it to investors.
')
Investors are looking for startups that will become very successful. Easy to say! In startups, as in some other areas, the distribution of startups according to their degree of success is subject to a power law, only in startups the distribution curve is even steeper. Very successful startups are so successful that they overshadow all others. And since the number of major successes per year can be counted on the finger (there is an opinion that there are on average 15 successful startups per year), investors generally look at start-ups in black and white glasses - either you have a chance to become one of 15, or not .
(There are still business angels who are interested in startups of a moderate degree of success, but they will not give up their major success.)
How to make your startup perceived as one of these 15 very successful startups? You will need 3 ingredients:
The most important ingredient is the founders. Most investors decide in the first minutes whether you are winners or losers, and once this opinion has been formed, it is already difficult to change. Any startup has both favorable factors for investment and unfavorable ones. If investors think of you as winners, then they give more weight to favorable factors. If on the contrary, on the contrary. For example, your startup has a large market, but each sale takes a long time. If investors liked you, they will want to invest, because this is a large market, and if not, they will not want to because of the long sales cycle.
They are not trying to mislead you by this, they just sometimes don’t understand why they didn’t like this or that startup. If you look like winners, they will like your idea more. Investors are people too, and they all have the same weaknesses as us.
The idea of ​​course also matters. The idea is like oil, which is poured into the fire, lit by a good location to the founders. As soon as you like investors, they will immediately begin to like your idea: “yes, and you could add a feature x.” (While, if you hadn’t liked them, they would have asked you: “yes, but why You do not have features x? ")
The most important thing in convincing investors is to appear assertive. An assertive person is one who always gets his way, regardless of the circumstances. “Assertive” is close in meaning to “confident”, with the only exception that you can be sure and wrong at the same time. Assertive people are reasonably self-confident.
Few people manage to seem assertive - some because they are really assertive, others because they know how to seem. But most of the founders, including those that have built very successful companies, do not very well seem assertive the very first time they come for an investment. What should they do?
What is definitely not worth doing is behaving provocatively, as experienced founders sometimes do. Perhaps investors are sometimes not so good in their assessments of technology, but they are too certain to perceive uncertainty. If you try to appear as someone who you are not, you will find yourself where you didn’t want to be: on the one hand, you will no longer be sincere, but on the other you will never become persuasive.
The path to assertiveness is through honesty. The degree of assertiveness that you instill is not constant. It varies depending on what you say. Most people look confident when they say that “one plus one equals two”, because they know that this is true. Although, one who is very insecure can be left at a loss if even “1 + 1 = 2” an investor will meet with skepticism. The magical ability of people who can seem assertive is that they can honestly say "we will earn a billion dollars a year." But you can say the same, if not about a billion a year, then about something less impressive, if you only manage to convince yourself of this.
That's the problem! Convince yourself that your startup is worth investing in, and when you explain it to investors, they will believe you. And when I say "convince yourself", I do not mean psychological tricks to increase self-esteem. I mean - really appreciate whether your startup investment is worthy. And if not, do not try to get an investment. But if so, when you tell investors that it is worth investing in your startup - they will believe you. You do not need to be a presentation wizard to explain what you understand and truly believe in.
To evaluate whether it is worth investing in your startup, you will have to be able to understand your topic. If you do not understand, no matter how convincing your speech may be, it will seem to investors as another example of the Dunning-Kruger effect. What it often is. Investors will quickly determine whether you understand the topic by how you answer their questions. So study your industry.
Why are the founders so persistently trying to convince investors that they themselves do not believe? Partly because we are taught this from school age.
When my friends, Robert Morris and Trevor Blackwell were graduate students, the professor told one of their students at the end of the report:
One of the side effects of the current education system is our ability to speak even when we have nothing to say. If you need to write a 10-page work, then you stretch it by ten pages, even if you have only one page of ideas (this also applies to this work). Many startups do the same when looking for investments. When it comes time to prepare a presentation, they take a fixed-size canvas and spread oil on it, only a very thin layer.
You need to look for investments not when you need them, or when the day has come for meeting with investors, but when you can convince investors, and not before. Unless you are a great actor, you cannot convince investors of what you are not sure about. They perfectly recognize the bullshit, even if you do not produce it intentionally. Do not waste your time, better stop, think and organize your thoughts. To convince yourself that a startup is worth investing in it, you have to figure out why it makes sense to invest in it. Thinking yourself about it will give you confidence and form a plan for success in your head.
You probably have already paid attention to how carefully I select words. I distinguish startups in which it is worth investing from startups that will succeed. No one knows if a startup will succeed. For investors, this is also good, because if you knew in advance which startup would succeed, the current valuation of the startup would be its future estimate, which means it would be impossible to make a profit investing. Investors know that any investment is a bet, and in a very unequal game.
Therefore, in order to prove that it is worth investing in you, you need to prove not that you will succeed, but that your chances are good enough. What makes your chances good enough? In addition to assertive founders, you need a realistic way to get a large chunk of a large market. Founders think of startups as ideas, and investors think of them as markets. If there are X paying customers who pay an average of $ Y per year for what we do, then your company's total addressable market (TAM, Total Addressable Market) = $ XY. Investors do not expect that you will receive all this money, but this is the ceiling of what you can get.
Your target market must be large and developed. Not necessarily large now. In fact, it is sometimes better to start in a small market, which will either turn into a large one, or from which you can move into a large one. There simply needs to be a realistic sequence of steps that will lead to a dominant position in a large market in a few years.
The degree of realism expected by investors depends on the startup stage. A three-month company on a demo day is a sufficiently formulated experiment to test a hypothesis that requires money. While the two-year-old company is picking up Round A, you need to show that the experiment worked.
Every large company, slightly lucky, they caught some kind of external wave. You also need to find a certain trend, usually asking yourself the question “Why now?” If this is such a great idea, then why has nobody implemented it yet? The ideal answer to this question is: “until recently this idea was bad, but now something has changed, and so far no one has noticed it.”
Microsoft, for example, did not rely on BASIC at all. But by that time, microcomputers were powerful enough to support it. And their distribution was the very wave that no one could have predicted until 1975.
I would like to think that Microsoft foresaw this wave in advance, but most likely it is not. Any successful company at the very beginning was nothing more than just a good bet. Microsoft was a great bet, but in the beginning it was not at all obvious. Approximately half of the companies we invested in seemed like as good a bet as Microsoft had at one time. What else does an investor need!
If your startup is worth the investment as much as Microsoft was worth the investment in its time, will you be able to convince investors? Not necessary. Many investors would have refused Microsoft. Many refused to Google. Waivers put you in a difficult position because other investors are asking you a question: “who else is investing? »What to say if you are already looking for an investment for a decent time, and no one has yet agreed?
People who manage to seem assertive often solve this problem, telling investors that despite the fact that no one has invested, some are going to do it. This is a very dubious tactic. Although it sucks that investors are less interested in your startup, and more about how other investors are looking at it, but it’s unlikely that you will sway the evil one. This is the most common lie to investors, and you need to be able to lie well so that they believe in it.
If you are not a professional negotiator (yes, even if you are a professional), the best solution would be to explain why investors rejected you and why they are wrong. If you know what is on the right track, then you know why investors are wrong in rejecting you. Experienced investors know that the best ideas are also the most frightening. They perfectly remember investors who rejected Google. Instead of being evasive and embarrassing to say that you were rejected (thereby acknowledging that they were right), you need to honestly tell you what could scare off investors. At best, you will seem more confident and better present this aspect of your startup. In the worst case, by telling the truth, you will free yourself from unpleasant surprises in the future when the unpleasant truth comes to light.
This strategy will work with the best investors who are not easy to bluff with and who are confident that most other investors are poorly programmed clones that release nuggets from time to time. Since the best investors are much smarter than the rest, and the best ideas initially seem to be bad, most investors, most likely, will reject you, except for a few of the best. It happened for example with Dropbox. Y Combinator was launched in Boston, and the first 3 years we alternately worked in Boston, then in the Valley. Since there were few Boston investors and they were all so timid, we brought the Boston stream on the second demo day to the Valley. Dropbox was in the Boston stream, which means that Boston investors first looked at it, and not one of them invested in it. Another thing to back up and sync, they thought. A couple of weeks later, Dropbox received Round A from Sequoia.
Thus, the founders think that they need to sell something very uncertain to investors - to convince them that the startup will be huge. And investors expect something much less speculative from them - confirmation that the company has signs of a good rate. Understanding this, you can approach the solution of this problem in a fundamentally different way - you can convince yourself, and then convince them.
And to convince them, you take advantage of not the vaguely-pompous marketing talk that you have prepared first, but the argument that you managed to convince yourself.
Just be brief. Many investors use this as a test, explaining that if you can’t tell your plans briefly, you do not fully understand them. But even if the investor does not have such a rule, it will still be unpleasant for him to listen to vague explanations.
So, here’s a recipe for how to impress investors, even if you don’t seem so pushy:
If you tell the truth, you will look confident. Who is the truth and stronger.
Original: http://paulgraham.com/convince.html
(This is one of two fundraising essays. The next one on fundraising tactics will be released soon.)
Weightlifting injuries usually occur when people tighten their back muscles instead of their leg muscles. Inexperienced founders make a similar mistake when trying to convince investors with their pitch. Most of them would benefit if the startup itself spoke for itself, if they started by trying to understand why it would make sense to invest in their startup, and then they would simply explain it to investors.
')
Investors are looking for startups that will become very successful. Easy to say! In startups, as in some other areas, the distribution of startups according to their degree of success is subject to a power law, only in startups the distribution curve is even steeper. Very successful startups are so successful that they overshadow all others. And since the number of major successes per year can be counted on the finger (there is an opinion that there are on average 15 successful startups per year), investors generally look at start-ups in black and white glasses - either you have a chance to become one of 15, or not .
(There are still business angels who are interested in startups of a moderate degree of success, but they will not give up their major success.)
How to make your startup perceived as one of these 15 very successful startups? You will need 3 ingredients:
- assertive founders
- large market
- current achievements.
Assertive founders
The most important ingredient is the founders. Most investors decide in the first minutes whether you are winners or losers, and once this opinion has been formed, it is already difficult to change. Any startup has both favorable factors for investment and unfavorable ones. If investors think of you as winners, then they give more weight to favorable factors. If on the contrary, on the contrary. For example, your startup has a large market, but each sale takes a long time. If investors liked you, they will want to invest, because this is a large market, and if not, they will not want to because of the long sales cycle.
They are not trying to mislead you by this, they just sometimes don’t understand why they didn’t like this or that startup. If you look like winners, they will like your idea more. Investors are people too, and they all have the same weaknesses as us.
The idea of ​​course also matters. The idea is like oil, which is poured into the fire, lit by a good location to the founders. As soon as you like investors, they will immediately begin to like your idea: “yes, and you could add a feature x.” (While, if you hadn’t liked them, they would have asked you: “yes, but why You do not have features x? ")
The most important thing in convincing investors is to appear assertive. An assertive person is one who always gets his way, regardless of the circumstances. “Assertive” is close in meaning to “confident”, with the only exception that you can be sure and wrong at the same time. Assertive people are reasonably self-confident.
Few people manage to seem assertive - some because they are really assertive, others because they know how to seem. But most of the founders, including those that have built very successful companies, do not very well seem assertive the very first time they come for an investment. What should they do?
What is definitely not worth doing is behaving provocatively, as experienced founders sometimes do. Perhaps investors are sometimes not so good in their assessments of technology, but they are too certain to perceive uncertainty. If you try to appear as someone who you are not, you will find yourself where you didn’t want to be: on the one hand, you will no longer be sincere, but on the other you will never become persuasive.
true
The path to assertiveness is through honesty. The degree of assertiveness that you instill is not constant. It varies depending on what you say. Most people look confident when they say that “one plus one equals two”, because they know that this is true. Although, one who is very insecure can be left at a loss if even “1 + 1 = 2” an investor will meet with skepticism. The magical ability of people who can seem assertive is that they can honestly say "we will earn a billion dollars a year." But you can say the same, if not about a billion a year, then about something less impressive, if you only manage to convince yourself of this.
That's the problem! Convince yourself that your startup is worth investing in, and when you explain it to investors, they will believe you. And when I say "convince yourself", I do not mean psychological tricks to increase self-esteem. I mean - really appreciate whether your startup investment is worthy. And if not, do not try to get an investment. But if so, when you tell investors that it is worth investing in your startup - they will believe you. You do not need to be a presentation wizard to explain what you understand and truly believe in.
To evaluate whether it is worth investing in your startup, you will have to be able to understand your topic. If you do not understand, no matter how convincing your speech may be, it will seem to investors as another example of the Dunning-Kruger effect. What it often is. Investors will quickly determine whether you understand the topic by how you answer their questions. So study your industry.
Why are the founders so persistently trying to convince investors that they themselves do not believe? Partly because we are taught this from school age.
When my friends, Robert Morris and Trevor Blackwell were graduate students, the professor told one of their students at the end of the report:
Which of these conclusions do you really believe?
One of the side effects of the current education system is our ability to speak even when we have nothing to say. If you need to write a 10-page work, then you stretch it by ten pages, even if you have only one page of ideas (this also applies to this work). Many startups do the same when looking for investments. When it comes time to prepare a presentation, they take a fixed-size canvas and spread oil on it, only a very thin layer.
You need to look for investments not when you need them, or when the day has come for meeting with investors, but when you can convince investors, and not before. Unless you are a great actor, you cannot convince investors of what you are not sure about. They perfectly recognize the bullshit, even if you do not produce it intentionally. Do not waste your time, better stop, think and organize your thoughts. To convince yourself that a startup is worth investing in it, you have to figure out why it makes sense to invest in it. Thinking yourself about it will give you confidence and form a plan for success in your head.
Market
You probably have already paid attention to how carefully I select words. I distinguish startups in which it is worth investing from startups that will succeed. No one knows if a startup will succeed. For investors, this is also good, because if you knew in advance which startup would succeed, the current valuation of the startup would be its future estimate, which means it would be impossible to make a profit investing. Investors know that any investment is a bet, and in a very unequal game.
Therefore, in order to prove that it is worth investing in you, you need to prove not that you will succeed, but that your chances are good enough. What makes your chances good enough? In addition to assertive founders, you need a realistic way to get a large chunk of a large market. Founders think of startups as ideas, and investors think of them as markets. If there are X paying customers who pay an average of $ Y per year for what we do, then your company's total addressable market (TAM, Total Addressable Market) = $ XY. Investors do not expect that you will receive all this money, but this is the ceiling of what you can get.
Your target market must be large and developed. Not necessarily large now. In fact, it is sometimes better to start in a small market, which will either turn into a large one, or from which you can move into a large one. There simply needs to be a realistic sequence of steps that will lead to a dominant position in a large market in a few years.
The degree of realism expected by investors depends on the startup stage. A three-month company on a demo day is a sufficiently formulated experiment to test a hypothesis that requires money. While the two-year-old company is picking up Round A, you need to show that the experiment worked.
Every large company, slightly lucky, they caught some kind of external wave. You also need to find a certain trend, usually asking yourself the question “Why now?” If this is such a great idea, then why has nobody implemented it yet? The ideal answer to this question is: “until recently this idea was bad, but now something has changed, and so far no one has noticed it.”
Microsoft, for example, did not rely on BASIC at all. But by that time, microcomputers were powerful enough to support it. And their distribution was the very wave that no one could have predicted until 1975.
I would like to think that Microsoft foresaw this wave in advance, but most likely it is not. Any successful company at the very beginning was nothing more than just a good bet. Microsoft was a great bet, but in the beginning it was not at all obvious. Approximately half of the companies we invested in seemed like as good a bet as Microsoft had at one time. What else does an investor need!
Waivers
If your startup is worth the investment as much as Microsoft was worth the investment in its time, will you be able to convince investors? Not necessary. Many investors would have refused Microsoft. Many refused to Google. Waivers put you in a difficult position because other investors are asking you a question: “who else is investing? »What to say if you are already looking for an investment for a decent time, and no one has yet agreed?
People who manage to seem assertive often solve this problem, telling investors that despite the fact that no one has invested, some are going to do it. This is a very dubious tactic. Although it sucks that investors are less interested in your startup, and more about how other investors are looking at it, but it’s unlikely that you will sway the evil one. This is the most common lie to investors, and you need to be able to lie well so that they believe in it.
If you are not a professional negotiator (yes, even if you are a professional), the best solution would be to explain why investors rejected you and why they are wrong. If you know what is on the right track, then you know why investors are wrong in rejecting you. Experienced investors know that the best ideas are also the most frightening. They perfectly remember investors who rejected Google. Instead of being evasive and embarrassing to say that you were rejected (thereby acknowledging that they were right), you need to honestly tell you what could scare off investors. At best, you will seem more confident and better present this aspect of your startup. In the worst case, by telling the truth, you will free yourself from unpleasant surprises in the future when the unpleasant truth comes to light.
This strategy will work with the best investors who are not easy to bluff with and who are confident that most other investors are poorly programmed clones that release nuggets from time to time. Since the best investors are much smarter than the rest, and the best ideas initially seem to be bad, most investors, most likely, will reject you, except for a few of the best. It happened for example with Dropbox. Y Combinator was launched in Boston, and the first 3 years we alternately worked in Boston, then in the Valley. Since there were few Boston investors and they were all so timid, we brought the Boston stream on the second demo day to the Valley. Dropbox was in the Boston stream, which means that Boston investors first looked at it, and not one of them invested in it. Another thing to back up and sync, they thought. A couple of weeks later, Dropbox received Round A from Sequoia.
Another way
Thus, the founders think that they need to sell something very uncertain to investors - to convince them that the startup will be huge. And investors expect something much less speculative from them - confirmation that the company has signs of a good rate. Understanding this, you can approach the solution of this problem in a fundamentally different way - you can convince yourself, and then convince them.
And to convince them, you take advantage of not the vaguely-pompous marketing talk that you have prepared first, but the argument that you managed to convince yourself.
Just be brief. Many investors use this as a test, explaining that if you can’t tell your plans briefly, you do not fully understand them. But even if the investor does not have such a rule, it will still be unpleasant for him to listen to vague explanations.
So, here’s a recipe for how to impress investors, even if you don’t seem so pushy:
- Do something that makes sense to invest.
- Understand why it makes sense to invest.
- Explain this to investors.
If you tell the truth, you will look confident. Who is the truth and stronger.
Original: http://paulgraham.com/convince.html
Source: https://habr.com/ru/post/189594/
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