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How to Convince Investors

paulgraham.com

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Re: How to Convince Investors

#51

Post by jasonkolb »

"Founders think of startups as ideas, but investors think of them as markets. If there are x number of customers who'd pay an average of $y per year for what you're making, then the total addressable market, or TAM, of your company is $xy. Investors don't expect you to collect all that money, but it's an upper bound on how big you can get."

I would really love some more color on this. What about a product that addresses a genuinely new market? For example our market is a subset of the analytics market targeted at a new set of data, similar to Mixpanel or KissMetrics. I honestly have no idea how to talk about the market because there is no analogue at this point. How can I apply this advice?

"But every company that gets really big is "lucky" in the sense that their growth is due mostly to some external wave they're riding, so to make a convincing case for becoming huge, you have to identify some specific trend you'll benefit from."

Is this the answer to my question? It doesn't give me an $xy, but it does give me the "wave" I'm riding. Is that a solid foundation for talking to investors?

"It's slightly dickish of investors to care more about who else is investing than any other aspect of your startup"

You have a silver tongue, PG :)

Re: How to Convince Investors

#52

Post by theorique »

keiferski wrote: post #30
michael_nielsen wrote: post #22

"Inexperienced founders... try to convince with their pitch. Most would be better off if they let their startup do the work—if they started by understanding why their startup is worth investing in, then simply explained this well to investors." This advice applies to many things in life -- getting a job, proposing marriage, networking in general. For instance, I've occasionally met people who obsess about crafting th…

I feel like this may be a tech-centric phenomenon, unfortunately. In a lot of industries, omitting the right keyword from your CV will exclude you from interviews.

I feel like this may be a tech-centric phenomenon, unfortunately. In a lot of industries, omitting the right keyword from your CV will exclude you from interviews.

Thing is, past the first N years of your career, your CV / resume doesn't (or shouldn't) matter much. Ideally, you are connected to important people in your industry, who know what your work (or portfolio) is, and what you are best suited to do.

In such a situation, a person who wants to hire you would make the decision in advance, coach you to put in the right keywords so that your resume passes all the necessary and appropriate HR tests, and make the hire happen.

It's all about networking, who you know. What you know is obviously important, but if nobody knows in advance that you can do it, it's harder to prove such a thing in an interview? (Of course, this is less true for new grads or newer professionals, who haven't had time to build up a professional track record.)

Re: How to Convince Investors

#53

Post by ronaldx »

wellboy wrote: post #42
mathattack wrote: post #38

Earlier quoted context omitted.

"The only thing you need is traction. Anything else doesn't matter. It seems insane, but investors are blinded by traction." Very true, but why is this insane? Investors see tons of people with great big ideas who talk about passion. Since you have to winnow the field, why not do it on something that matters (traction) versus something that doesn't (the alma mater of the founder, or how they dressed).

It's insane, because if you invest in a startup with decent traction you don't have your 100x big hit anymore, because you invest in a valuation at say $4M. Instead, if you had spotted the startup's potential pre-traction, maybe just 1 or 2 months before it gained traction, you could have invested half the amount at a $2M val. And this ability,ladies and gentlemen, to spot a startup 1-2 months pre-traction, makes the…

As long as a start up with decent traction has 4x more chance of success (ignoring for now the extra time required for due diligence), which seems likely, a rational investor would typically go for the 25x option.

Re: How to Convince Investors

#54

Post by patrickk »

wellboy wrote: post #42
mathattack wrote: post #38

Earlier quoted context omitted.

"The only thing you need is traction. Anything else doesn't matter. It seems insane, but investors are blinded by traction." Very true, but why is this insane? Investors see tons of people with great big ideas who talk about passion. Since you have to winnow the field, why not do it on something that matters (traction) versus something that doesn't (the alma mater of the founder, or how they dressed).

It's insane, because if you invest in a startup with decent traction you don't have your 100x big hit anymore, because you invest in a valuation at say $4M. Instead, if you had spotted the startup's potential pre-traction, maybe just 1 or 2 months before it gained traction, you could have invested half the amount at a $2M val. And this ability,ladies and gentlemen, to spot a startup 1-2 months pre-traction, makes the…

Nice explanation.

It might be worth it for the VC to wait and see, then overpay, because 1 or 2 months could be a significant percentage of a young companies' total life. They are overpaying for the extra data points and insight, in effect.

Re: How to Convince Investors

#56

Post by lumens »

nostromo wrote: post #5

I <3 this essay. "Fake it 'til you make it" seems to be the m.o. in a lot of entrepreneurial circles. I've honestly never known if this is actually a good strategy or not. It seems the answer is no.

Fake It Till You Make It is a fantastic strategy for some things, utter disaster for others. There is no panacea in startups, but don't discount the colloquialism as devoid of value, either.

Re: How to Convince Investors

#57

Post by [deleted] »

jasonkolb wrote: post #51

"Founders think of startups as ideas, but investors think of them as markets. If there are x number of customers who'd pay an average of $y per year for what you're making, then the total addressable market, or TAM, of your company is $xy. Investors don't expect you to collect all that money, but it's an upper bound on how big you can get." I would really love some more color on this. What about a product that addres…

[deleted]

Re: How to Convince Investors

#58

Post by GuiA »

michael_nielsen wrote: post #22

"Inexperienced founders... try to convince with their pitch. Most would be better off if they let their startup do the work—if they started by understanding why their startup is worth investing in, then simply explained this well to investors." This advice applies to many things in life -- getting a job, proposing marriage, networking in general. For instance, I've occasionally met people who obsess about crafting th…

That is something I've been trying to apply in my life (and apply it to other people as well)- words are cheaper than actions, so let your actions do the talking.

Re: How to Convince Investors

#59

Post by wellboy »

patrickk wrote: post #54
wellboy wrote: post #42

Earlier quoted context omitted.

It's insane, because if you invest in a startup with decent traction you don't have your 100x big hit anymore, because you invest in a valuation at say $4M. Instead, if you had spotted the startup's potential pre-traction, maybe just 1 or 2 months before it gained traction, you could have invested half the amount at a $2M val. And this ability,ladies and gentlemen, to spot a startup 1-2 months pre-traction, makes the…

Nice explanation. It might be worth it for the VC to wait and see, then overpay, because 1 or 2 months could be a significant percentage of a young companies' total life. They are overpaying for the extra data points and insight, in effect.

Thanks and good point and I think that's where new Angels or other investors without any track record or network can get the good deals.

By finding founders whose startups are just about to take off, even better with the founders not knowing it yet. :)

Re: How to Convince Investors

#60

Post by jt2190 »

larrys wrote: post #48
salimmadjd wrote: post #47

That's the secret. Convince yourself that your startup is worth investing in, and then when you explain this to investors they'll believe you. This is one of the best advice for both fund-raising or anything else in life and it's basically the same strategy Arnold Schwarzenegger used to become the "number one star" in hollywood [1] as explained by Steve Chandler: * ...Then I asked just how he planned to become Hollyw…

Similar also to "the method" in acting: http://en.wikipedia.org/wiki/Method_acting I use this in negotiation as well. You convince yourself that you are playing a role and do what is consistent with the role you are playing. You are an actor. Takes quite a bit of practice.

I'm having difficulty squaring what you do with what pg is recommending:

  > And by convince yourself, I don't mean play mind games 
  > with yourself to boost your confidence. I mean truly 
  > evaluate whether your startup is worth investing in.
Isn't "playing a role" a form of mind games?
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