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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

Old Brain / New Brain 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.

Be confident.

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.

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33 Responses to “Raising capital: Six tips on Eating Fear”

  1. kr8tr Says:

    I couldn’t agree more when it comes to showing determination - and it goes a lot further than just getting funding. Six years ago I approached a senior manager about building a new Software Quality Assurance group (for WiFI, back in the early days). I had little management experience, I was an independant developer/contributor - he had little reason to believe I could pull it off. I sold my manager (actually, my boss’s boss) on me, not on the idea of the SQA department. Over the next seven years I built a 46 person group in four countries and three states - with a budget over 10m a year. To this day the manager claims he just “believed me”.

    I would add one more thing though - never be shy about admitting what you don’t know, but give a date that you’ll get back to them with an answer. Nobody knows everything, but the really smart people know how to learn what they need to learn (and know not to act like they already know everything).

  2. Julius Says:

    Great article and great site. I hope it will work the way it should. I’ve added my 3 ideas to help everything start :) .

    I’m going towards becoming a startup myself probably; building a charity social network site. (helpalot.org)

    Btw with the puzzle thingy; level 2, I’d expected foo and bar to work.. maybe I’m missing something?

  3. Brandon Franklin Says:

    Great article. Thanks for this!

  4. VentureWoods Says:

    Of Capital, Fear and Diet…

    Michael Sikorsky of Cambrian House a Crowd Sourced software play has written an interesting post,
    Raising capital: Six tips on Eating Fear.
    Interesting observations include:
    Most investors invest emotionally and then justify their decisions rationall…

  5. Krish Says:

    “Just what the entrepreneurs ordered ( needed )…!”

    The nudge on the irrelevance of the biz plan takes the cake….Especially at a time when blown up biz plans with awful charts and unbelievable numbers have driven many a VC nuts….!

    Makes amazing sense.

  6. spungey Says:

    Woo Hoo!

    That’s really useful. I really like that you’re promoting entrepreneurship instead of hoarding it. Today I’m thanking an abundance of the invisible hand for guiding me to Cambrian.

    and … does Quebec really mean “who’s Bec”?

  7. James Says:

    You should have fear. This is the most comically bad website I’ve seen in years. In 6 months it will be indicative of how bad Bubble 2.0 really was, much the same as WebVan.

    I mean really, look at your business model. Who gave you the $2.5 million?

    Oh this is going to be bad.

    Hope you’ve stockpiled some of the cash somewhere easy at hand when you need to make a quick getaway.

  8. Murray Rasmusson Says:

    Jon : Interesting tips on raising money . Good luck also . Dad

  9. JR Says:

    Thx Dad

  10. MJ Says:

    Hi James,

    Thank you for sharing your opinions with us. We seek all feedback, especially negative, and would love to hear more of your thoughts.

    You can reach anytime either here on the blog or at mj at cambrianhouse.com.

    Sincerely - MJ

  11. Lucas Rodriguez Cervera Says:

    Interesting (and non usual) article. Thanks for the applicable tips you include in it. I will probably apply some in the next future.

  12. A.A. Says:

    I just wanted to thank the writers of this article and the creator of this site (one and the same, I understand). I had been fundraising in the dark for four years (yes, I forgive myself), before reading this article. But, I truly believe in devine timing and thank you once again for your belief in an abundant universe. All the best.

  13. BradleyWinters Says:

    Nice. I absolutely agree with you.
    Keep up the nice work. I’ll be back for more!

  14. LavernRengerson Says:

    Oh I like that! Nice post.
    This place is alright…I’ll be back for sure.

  15. BreadStreet Says:

    I like success stories, one can find many at http://sec.gov/edgar/searchedgar/webusers.htm . We offer pre-screened investor prospects. Our Investor relations group is awsome. But, you are exactly right it takes much determination to get funded, even with the best of leads. Call us if you wish to discuss at 325-653-7200

  16. Jun Parker Says:

    Hi MJ,

    So many positive thoughts running through my mind after reading this outstanding article and all the responses. I felt a strong sense to respond as well and give you kudos for all your accomplishments. This is exactly what I was hoping to find when I googled “raising capital.” The tips were very helpful. Thank You very much.

    Best regards,

    Jun Parker
    (760) 708-0186

    p.s. Here’s my invention: http://www.WinnersBank200.com
    Looking forward to sending you a complimentary one.

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    Humm…

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  21. Michael N. Brette, J.D. Says:

    People seeking capital never present their ideas from the investors point of view. Investors want to know “why should I invest in your deal” “if I do what is the exist”, “How do I get a return on my capital.” These questions are never answered in most business plans or presentations.

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