As your familiarity with a particular field grows, you become adept at identifying recurrent patterns in human behavior.
Having dedicated more than 2,000 days to working closely with startup founders, I have noticed a clear distinction between two distinct types of founders while engaging with investors: those who treat investors as suppliers and those who treat them as customers.
Founders with a supplier-oriented approach perceive investors solely as suppliers of capital. They approach the investment process as a transactional exchange, seeking funds from investors who meet their specific needs and requirements. The emphasis is on finding efficient investors who can effectively fulfill this role.
Founders with a customer-oriented approach go beyond the transactional aspect of fundraising. They prioritize understanding the investors' needsand strive to align their startup's value proposition with those needs. By providing a compelling value proposition and delivering outcomes that resonate with the investors' interests, founders aim to stand out.
Being customer-centric starts by embracing humility to shift:
from the common biased belief that your business, being of the highest quality from your perspective, is the most deserving of investments,
to the acknowledgment that an investor's deal flow is filled with other great businesses, some even better than yours, and to succeed, you must differentiate yourself.
You can spot a founder who lacks humility when they say things like:
"They told me it's too early for them. They want me to come back once I hit some milestones. But here's the thing, they just don't get it! By the time I reach that milestone, I won't even need them anymore!"
"I pour my heart and soul into this startup, and they brush me off like that. They don't see the potential, the vision I have. It's like they're missing out on a golden opportunity."
"Venture capitalists really need to reconsider their profession because, in the startup world, we need investors willing to roll the dice and bet on the future."
"While they're busy pouring money into pet food startups, I'll be out there making a real impact, proving that my idea is worth every penny and more."
Don't get me wrong, I don't blame them, as building a company from nothing is incredibly challenging. Besides, I have immense respect for founders who have overcome rejection so many times without quitting.
Experiencing frustration, resentment, and anger when facing rejection is a natural response that we have all encountered at some point in our lives, including myself, such as last week when a founder chose to work with another advisor I perceived as very less competent than myself (🙄).
Dealing with rejection by being angry is easy, but showing empathy in such situations is a much more significant challenge. Actually, the first thing I emphasize to my clients is the importance of being empathetic towards investors.
I encourage them to channel the same level of empathy they exhibit when trying to make the most appealing offer to win over high-value customers.
Making a compelling offer starts by gaining insights into what makes an investor tick. But this level of insight comes from investors' feedback, which is the most valuable and expensive data to collect.
Getting enough investors' feedback to have actionable and valuable insights requires access to a large pool of investors, so you can collect data directly from them by engaging, negotiating, and dealing with them regularly.
I've been doing this for the past seven years, and this essay is an attempt to improve your odds of getting funded by focusing on developing your awareness of the potential objections investors may have when evaluating your offer.
Let's dive!
To truly understand what motivates investors, it is essential to grasp the concepts of Value Creation, Value Capture, and Tailwind. These factors are crucial in shaping an investor's perspective and decision-making process.
By delving into these critical elements, you can gain valuable insights into the drivers behind investor behavior and tailor your approach accordingly.
With time, I come to see companies as problem-solving engine.
The core purpose of any company is to identify, address, and resolve problems that customers or society face. Through their problem-solving efforts, companies are creating value for their customers by:
Alleviating their pain points (saving time, reducing costs, etc.)
Improving their life (enhancing productivity, connecting with people, etc.)
In other words, business begins with value creation. As a founder, you invest resources, capital, and talent to create value that can be converted into profits. What I am referring to is value capture.
Investors often emphasize the distinction between value creation and value capture. It's essential to recognize that merely creating value for someone does not guarantee that they will pay enough to ensure profit.
Adopting an investor-centric approach start by asking yourself in the first place, if the value captured worth the resources needed to create that value.
Value Creation & Value Capture is one of Peter Thiel's favorite topics. Peter Thiel is an entrepreneur, investor, and writer. He co-founded PayPal and invested in relatively known companies like Facebook, LinkedIn, and Yelp, and his book Zero to One: Notes on Startups is a New York Times bestseller.
From Peter Thiel, the first rule of value creation & value capture:
If you want to create and capture lasting value, don’t build an undifferentiated commodity business.
A great business creates and captures value (by being different), but more is needed to become an exciting investment opportunity. This company must surf on trends to become exciting. Investors often use the word Tailwind.
Before investors even learn about the company's business model, they want to understand the reality of the world this company is taking advantage of.
Basically, they are trying to get a sense of tailwinds explaining why an increasing number of people will use this company product/service (value creation) with the same willingness to pay (value capture).
Indeed, there are scenarios where a favorable tailwind exists, but no company is positioned to ride it, while there are exceptional companies with no tailwind.
Your company must be perceived as a great business taking advantage of tailwinds to become an exciting investment opportunity.
To illustrate the articulation of the Value Capture, Value Creation, and Tailwinds concepts, I'm going to use a Venn diagram. A Venn diagram is a graphical representation of the relationships between different sets of concepts.
By the author:Thomas Tcheudjio
Investors are entrusted with capital to invest in companies that are ⚡️ ⚡️️, thanks to their ability to access deal flow, decision-making engine, and dealmaking ability.
In theory, investors aim to invest in companies lying at the intersection of the Venn diagram — those High-Quality businesses that possess the ideal characteristics of hyper-growth, driven by influential trends, along with strong and sustainable unit economics.
In practice, such businesses are scarce, and investors actually place their bets on companies that fall within the average range of the Venn diagram but have the potential to become High-Quality businesses.
This is the realm where the power of perception, emotional dynamics, and psychological factors come into play, forming the intangible elements that make me love my job.
Understanding where you stand in the Venn diagram empowers you to navigate these intangibles successfully, propelling your business from being relatively Average to strikingly Different.
By author: Thomas Tcheudjio
Value Creation + Tailwinds
Fast-growing business with unsustainable unit economics.
In that situation, you have a use case that creates value for a critical mass of customers thanks to Tailwind (AI breakthrough, for example), proven by the fast growth of revenues/usage. However, customers need to perceive more differentiation to justify paying a premium price, which makes it challenging to achieve a profitable CAC at scale.
Those businesses found themselves with an unhealthy and unsustainable business translating with an LTV/CAC < 3x and a CAC Payback > 12 months when calculating correctly. Investing in those businesses means investors must believe that:
tailwinds will allow the company to reach scale first to become the category leader.
with scale, unit economics will improve.
differentiation will come from an aggressive product line expansion and available features.
Value Capture + Tailwinds
Slow-growing, sub-scale business with sustainable unit economics.
In that situation, you have a business model that has demonstrated its ability to capture value, proven by sustainable unit economics. However, the use case you have built doesn’t create value for a critical mass of customers for your business to reach scale.
Those businesses are usually stuck within the $500k-$3m revenue range with a growth rate below 30% yoy. Investing in those businesses means investors must believe that:
tailwinds have created a momentum that makes your product more valuable to an increasing number of customers.
your value proposition is different enough that this increasing number of potential customers choose you over the competition.
this increasing number of potential customers will have the same willingness to pay as your initial customers.
Value Creation + Value Capture
Slow-growing, scale business with sustainable unit economics.
In that situation, you have a reach scale and profitability. However, your number of potential customers and your customers' share of wallet are constraints, limiting growth opportunities.
Those businesses are in the profitable $5–10m revenues range with a growth rate of below 30% yoy and little-to-no opportunity to reinvest for growth. Investing in those businesses means investors must believe that:
this great business is the best positioned to ride a tailwind.
tailwinds will expand the total addressable market by creating value for a larger critical mass of customers and increasing their customers' share of wallet.
this great business will scale its operations effectively.
Based on my experience, most businesses seeking funding are in the Value Creation + Tailwinds or Value Capture + Tailwinds category.
Most people need to realize that investing is, first and foremost, a risk management activity. The more elements an investor must believe for an investment to work, the higher the perceived risk, leading to an increasing number of objections before proceeding.
Proactively addressing investor objections upfront is a highly effective strategy to improve your chances of securing funding. By openly acknowledging and discussing the risks associated with your proposal, you demonstrate a proactive understanding of and commitment to addressing the concerns and requirements of potential investors.
From an investor POV, you’ll go from an average, unaware and naive founder to a strikingly different, credible and trustworthy entrepreneur.
Having familiarized yourself with the common objections, you are now more prepared to address them effectively. However, as every business is different, I highly suggest hiring an advisor if you want a more tailored approach to address your unique objections.
See you!