Raising capital: Six tips on Eating Fear
Last November Michael Sikorsky (MJ) estimated that he would require around $1.5 Million dollars to fund our new company - Cambrian House. Not only did he raise the money on his own, he did it in less than two months. (Note: the final raise was $2.5M)
When I asked MJ for his secret to raising capital he responded “Basically, you have to eat a lot of fear”.
Thinking that was an interesting topic, I sat down and asked MJ if he could explain what eating fear meant, and offer any tips for those with generous portions of fear on their plate.
He immediately offered the following six tips, without any explanation:
Tip 1: Sincerely believe.
Tip 2: Screw the business plan. Tell them your story.
Tip 3: Emit confidence.
Tip 4: Pretend you already have the money.
Tip 5: Don’t marry every woman you date.
Tip 6: Prime the pump.
But before we delve into the six tips, we need to understand a couple things about fear.
Eat this: rational and emotional fear
There are two types of fear entrepreneurs need to eat when raising capital – one seemingly based on ‘reason’ (let’s call this rational fear), and another deeply rooted in emotion.
You need to be prepared to eat rational fear, but all the good hard digestive work is in consuming emotional fear.
This, is the key point: Most investors invest emotionally and then justify their decisions rationally. Rational fear is a servant to emotional fear. It is a complex and intelligent servant, but a servant nonetheless. Emotional fear calls the shots and it doesn’t read business plans.
Emotional fear is a much more primal fear. It is what sustained us before we had big brains (think: fight, flight, and feeding). It comes from the prior 499 million years of evolution – the Old Brain. It’s the instinctive, gut wrenching fear that enabled us to make split second decisions and stay out of the jaws of saber tooth tigers. Emotional fear is felt in the gut.
You can’t reason with emotional fear.
Rational fear – logic and reason
Entrepreneurs usually do alright when it comes to eating rational fear. That’s because this type of fear is rooted in logic and reason. It’s the type of fear people have whenever they face something new or risky to which they want to believe thinking and reasoning apply (like investing in a startup). They need a model to evaluate logically whether this is right for them.
Rational fear needs to be justified. When the investor goes to a cocktail party, she needs to be able to explain why she invested in your startup. She just can’t say because ‘it felt right’. She needs to be able to justify, to herself and her friends why it was such a great move. This is how she placates the rational fear and justifies her cocktail party sound bites.
When eating rational fear you will be fielding logical questions like:
- Who are your competitors?
- What’s the size of your market?
- What’s your sales strategy?
- How does the technology work?
- When do I get my money back?
Traditionally most of this would be communicated through your business plan, although, we don’t recommend writing one.
An aside: For a good book on how to answer questions like these, and why you should never say your exit plan is acquisition or to go public, read Guy Kawasaki’s Art of the Start. Also read: http://www.paulgraham.com/startupfunding.html.
Now as important as eating rational fear is, it’s barely even an appetizer. Before investors write that cheque you still need to face their darkest, most primal fears – those based on emotion.
Emotional fear – instinct, gut, and intuition in the Old Brain
Emotional fear is where we make all of our decisions from - especially when it comes to investing in startups.
In his book, How the Brain Works, author Leslie Hart observes, “Much evidence now indicates that the ‘Old Brain’ is the main switch in determining what sensory inputs will go to the new brain, and what decisions will be accepted.”
Emotional fear is primal and instinctive. It is based on gut and intuition. Emotional fear would never form a committee. Reason and deliberation have no place here.
Where rational fear questions focused on reason, emotional fear questions come from the gut:
- Can I trust this person?
- Do I like them?
- Do I believe that they can actually pull this off?
This emotional ‘instinctive’ fear is the harder of the two fears to eat because it can’t be easily fooled by well reasoned logical arguments. It relies and more on emotion, feeling, and how the individual feels about you personally. That’s right – it’s actually all how they feel about you.
Initially this can be confusing to entrepreneurs who are struggling to close financing. They begin to doubt their numbers, their business plan, and their power points when it’s actually none of those things.
The reason most people don’t invest in your startup is because their spidey sense is giving them warning signs. They haven’t bought into you yet.
You haven’t sold them on you.
You could have the most amateur answers in the world for how your business is going to operate and people will still invest in you if they believe in you. It’s just true.
Addressing the emotional fear – back to the 6 tips
Now that we have covered the basics on fear, we are ready to cover the six tips on how to effectively eat it.
Tip 1: Sincerely believe
You gotta believe! If your actions, language, and tone don’t communicate that you completely believe in what you are doing, you are not going to be eating much fear – you are going to be feeding it.
You have to show them your intent.
By showing your intent people usually think you have to show them you have some ‘skin in the game’. Money is certainly one way to show your intent but money alone isn’t enough. You have to show them it is your mission in life to make your venture a success. You were literally put on this planet for this purpose. This is your destiny. It’s what you’ve been training for all your life.
Showing how much you believe doesn’t mean getting cocky and naively thinking there are never going to be set backs, failures, and crises along the way (trust me, there will be). It means showing investors that you have your head, heart, and soul into your business.
If you don’t believe, no one else will.
Tip 2: Screw the business plan. Tell them your story.
Investors don’t invest in business plans – they invest in people.
Going over the business plan is all well and good but what really makes people perk up and pay attention is when you tell them your story and why you believe you can make them a lot of money.
Give the investors a glimpse inside of you - not the business. Investors want to understand you and where you’re coming from.
What makes you think you can pull this off?
What makes you an expert on x, y, and z?
How did you come up with this idea?
Toot your horn and talk about you. If they can’t map and understand you, they’re not going to invest.
Tip 3: Emit confidence
No matter how scared or nervous you may be asking people for their money, you need to emit an aura of confidence. You need to look every fear, concern, and challenge in the eye and explain how you intend to deal with it.
This doesn’t mean unbridled arrogance. It means listening quietly to people’s concerns, and showing them a light at the end of the tunnel.
Yes there will be setbacks.
Yes other companies may hold a key patent.
Yes there will definitely be competition.
Yes Google might enter that space.
Admit there will be challenges. Then address each one confidently as best you can.
The company holding that key patent may partner with us.
It would be a great validation of our business if others started copying us.
Yahoo can’t move as fast as we can – in fact we would make a great acquisition for them.
Sincerely listen to people. Accept feedback and address their concerns one at a time. Thank people for their comments and criticisms. But at the end of the day confidently explain that despite the challenges ahead, there is nothing stopping you from being successful.
Tip 4: Pretend you already have the money
This tip was accidentally discovered by MJ when he realized that the longer he took to get back to people, the more interested they became in his investment.
When MJ listened to phone message of investors whom he hadn’t followed up with for some time, he often heard a sense of urgency in their voices. It seems that MJ’s natural tendency to procrastinate worked to his advantage. By not returning people’s phone calls, they began to imagine the worst - MJ didn’t really need their money or the opportunity to invest was slipping away.
When investors feel a sense of loss on an investment, imaginary or real, one of two things is going to happen:
a) They are going to let the opportunity pass if they are truly not interested, or
b) They are going to become anxious because they don’t want to miss out on the action.
Scenario b) happens way more often then you might think.
That feeling of scarcity is hitting one of the oldest innate feelings in man – our fear or sense of loss. We just can’t resist something that is made scarce to us.
We are not advocating being dishonest with investors. Just don’t return everyone’s phone call right way
Tip 5: Don’t marry every woman you date
Don’t waste time on leads that have no chance of investing. Prune dead leads fast, and move on.
The universe is abundant and there is more money out there then you could possibly spend in a lifetime. Don’t sink time into a marriage that just isn’t going to work out. Find another date and move on fast. Your time is too valuable to be chasing money that is not there.
Pruning leads can be counter intuitive for those who are used to chasing things they have little chance of acquiring. In high school they chased the boys and girls that would never date them. Everyone has stayed in dead end relationships longer then they should.
Don’t chase money that isn’t there. Prune dead leads fast.
Tip 6: Prime the pump
Priming the pump means starting to talk to investors before you need the money.
It’s much harder to raise money cold calling investors you have no relationship with at the 11th. They barely know you and don’t have much to go on.
When you prime the pump early you get the opportunity to partner with investors instead of pitching them.
If you think you need VC money, start partnering with KPCB on Sand Hill Road sooner rather than later. Try something like this:
“I don’t have a pitch for you, but I think we should be working together.
Can I share with you an opportunity we are looking at?
If you were to participate, what would the deal look like?
Would you ever want to be part of a Series A round of financing?
Help me understand what kind of ideas and deal you would be interested in.”
This is much less direct then coming in and pitching your whole story in 20 minutes and crossing your fingers hoping for a ‘yes’. By partnering, you have a chance to setup things right so it’s easier for them to say ‘yes’ when the time comes.
By letting the relationship blossom over time you can invoke commitment and consistency. Because they have been working with you, and because you have been communicating with them continuously, you are more known to them and easier to invest in.
Bonus material : MJ’s First law of startups
1. The more sophisticated the investor, the less worried they are about the business plan.
Something MJ noticed with pitching investors, is that the sophisticated ones (those who have made lots of money funding other startups) needed less hand holding on the business plan, and were more into who he was.
Sophisticated investors look more at the person, and less at the plan. They know that good ideas are a dime a dozen (they probably have a few of their own). They also know that to take an idea and turn it into a profitable business involves a lot of work, determination, and persistence. A good idea by itself is worth little without someone determined to see it through and execute.
That’s why, when sizing up an investment, they are focusing more on the person, and less on the PowerPoint.
Eating fear is an art
MJ is the first to admit that raising capital is an art unto itself. Eating fear nears the top of his list of skills entrepreneurs need if they are going to successfully raise money themselves.
While would be entrepreneurs are pretty good at digesting investors rational fears, the emotional fears gives many indigestion. The key point to remember is that investors invest emotionally and then justify their decisions rationally. That means that they may tell their peers they believe in your business plan, but what they really believe in is you.
When entrepreneurs sincerely believe, project a genuine aura of confidence, and act as if they are destined to raise the money, they often do.