Optimizing Investor Interactions

Optimizing Investor Interactions

Startup Success: A Startup Fundraising Series

I often say that successful early-stage fundraising is essentially a transfer of enthusiasm from founder to investor. If the investor gets even half as excited as you are about the venture you’re working on, their investment decision is already pointed strongly in your favor. So, in this article we will evaluate some methods of transferring enthusiasm.

Investors Write Checks For Outcomes, Not Activities

During interactions with investors, you will surely inform them how much you’re raising. With that, you might get the obvious follow-up question: “Why is that the right amount to raise?” It’s a very justifiable question, but it is commonly met with a host of unacceptable, enthusiasm-killing responses, such as the amount of runway it affords, the number of employees that can be hired, or the amount of dilution the founders are willing to tolerate.

To every one of those answers, my response is: “So what? Why do I care?”

Investors write checks for outcomes, not activities. If you want to get them excited, tell them about those outcomes—how you’re going to use your newly acquired capital to acquire a bunch of customers, open new markets, launch new sources of revenue, secure strategic partnerships, dramatically improve KPIs, and the like. Rather than explain to the investor how you are going to spend their money, tell them what you’re going to accomplish with it.

This doesn’t mean your planned activities and expenditures aren’t important. We call them the use of proceeds. The investor might ask how you plan to acquire those next 60 paying customers and what your market activation playbook looks like. That’s your chance—and obligation—to dive into the key activities that will enable you to accomplish the expected outcomes.

The concept is simple. Investors don’t care as much about how you plan to use their money as they do about what you expect to accomplish with their money in your pursuit of an eventual great exit.

Questions To Expect From Investors

What other questions should you be ready to answer in a way that transfers enthusiasm? The full list is very long and includes many obvious questions that you’ll intuitively be prepared for. Let’s skip those and instead cover a handful of important questions you should be prepared for, regardless of your funding stage.

Why are you and your cofounders the right ones to lead this venture?

Of course you are smart and are hugely dedicated to your mission, so consider that table stakes. Did one or more of you suffer directly from the problem you’re solving and are therefore on a passionate mission to solve it? Do any of you have relevant experience in your industry or technology focus area? Have any of the founders already built great companies or experienced exits that made investors a lot of money? These are examples of unique team attributes investors like to bet on.

How do you acquire customers?

Take the investor on a journey through your customer acquisition strategy. What methods do you use? Which have proven to be most successful? What is the average cycle time for the buyer’s journey? What are your important customer-acquisition-related KPIs, and how have they improved over time? Investors love it when they sense a well-oiled customer acquisition machine.

How do you make money?

On the surface, this is a very simple question that ties to your pricing or monetization strategy. But why just tell the investor you have two subscription offerings at $399 and $999 per month? You have an opportunity to impress them with your understanding of your monetization strategy. Things like relative sales mix across your product line, rates of upsell or cross-sell, conversion rates from freemium to paid, and information about gross profit margins all add color and dimension to your response. What interesting insights can you share about your pricing and monetization strategy?

Is the market large enough?

This might be a trick question. The investor knows you have already sized your market, but they want to see if you understand that size isn’t everything. What else is it about your market that makes it ideal for growing a great company? Is it dynamic and undergoing massive transformation? Is it highly fragmented and available for entry or dominated by a small number of behemoths? When asked this question, start with obligatory responses about the size of your market—total available market (TAM), serviceable available market (SAM), beachhead (the small segment of the market you’re going to capture first)—and then paint a more complete picture with additional favorable anecdotes.

What evidence do you have that the market desperately needs your product?

The key word in this question is evidence. A ton of paying customers is obviously direct evidence, but without that, you will need to draw from the massive amount of customer discovery and related research you conducted before you started building your product, as well as the additional interactions you had with customers during the beta-testing phase. Do your customers desperately need your product or do they just want it? There’s a big difference.

What unfair advantages do you have?

Having the lowest price or the best user experience is not an unfair advantage. These are rather short-lived advantages—not unfair ones. A really strong patent filing and access to proprietary data are examples of unfair advantages, assets your competition doesn’t—and can’t—have. It’s actually possible that you don’t have any truly unfair advantages over your competition. Many startups don’t. But if you have some special sauce that nobody else has figured out, this question gives you an opportunity to boast—and get the investor enthused.

Evidencing Traction

Traction is a very special attribute when it comes to fundraising. It’s something investors will want to learn a lot about during interactions with you, and it trumps almost any other form of evidence you might have that your business is worth investing in. If you have that most genuine form of traction (paying customers), you should diplomatically flaunt it. If you don’t have it, everything else you do will mostly be hand waving to distract from that fact.

If you don’t yet have paying customers, don’t give up. Instead, get creative on your definition of traction. Traction can be just about anything that serves as evidence of desirability (the market wants it) and business model viability. Work your way backward from paying customers to identify the closest thing you do have. This might start with free trials or signed letters of intent to order and progress through paid trials and firm orders that haven’t yet been delivered.

If your business is of the type to not generate revenue for quite some time (e.g., it involves deep science or requires regulatory approvals), it’s time to get even more creative. Remembering my definition of traction (evidence of desirability and viability), identify other things that can serve as some level of validation. Examples include favorable reviews by a notable industry influencer, relevant awards, acceptance into a credible startup accelerator, and milestones reached toward regulatory certification.

Aspirations, exaggerations, and outright lies

Most startup founders don’t realize how bad they are at predicting the future, how far they stretch their claims, and how much refactoring investors have to do as a result. The most successful entrepreneurs thrive in the face of perpetual chaos and skepticism. They have unmatched survival strengths and are regularly told to “fake it until you make it.” But there is a parallel need to earn both respect and credibility from other stakeholders, particularly investors. Understanding the difference between aspirations, exaggerations, and outright lies is a good place to start.


In the early days, startups have lots of aspirations. Your initial business plan is a huge list of assumptions, and most of those assumptions are actually aspirations that need to be true in order for your proposed business plan to hang together without a big pivot.

Prototypical startups are often run by first-time founders who are either just starting or are early in their business career. Because of this, their forecasts (aspirations) are way too aggressive and optimistic. I’m not talking about their long-term vision and potential, but rather their predictions of what will happen in the next 90 days, and especially in the next 12 months.

Your first step is to look back at the prior goals and forecasts you and your cofounders wrote down. How many of them did you fully accomplish? In the range of 50 percent is probably typical, 20 to 30 percent is concerning, and 70 percent or greater is impressive. I’m mostly talking about the prelaunch and early revenue phases of the company, when you’re still trying to develop a well-oiled machine. The bar obviously gets much higher as you approach the sweet spot for a Series A.

If your track record is favorable, great. If not, you need to quickly get to work on improving it so you can demonstrate to investors that you’re a member of the elite 10 percent that accomplishes what they say they will.


Just as investors typically apply a haircut to stated predictions until you demonstrate a track record of achieving them, they’ve unfortunately learned to do the same with your claims about what you have already accomplished. This is due to the regular exaggerations that many founders make. I know—not you. But let me first give some examples to see if you still feel the same.

Claim: “We have a product that does A, B, and C.”

Reality: “We are actively building a product that will be able to do A, B, and C.”

Claim: “We’re currently at $25,000 in monthly recurring revenue.”

Reality: “Last month, we recognized $25,000 in revenue. Of that, $15,000 was from subscription software, and $10,000 was from a one-off services project.”

Claim: “We’ve closed $300,000 of our $1 million seed round.”

Reality: “For our $1 million seed round, we have $100,000 in the bank, $150,000 in verbal commitments, and $50,000 in indications of interest.”

Claim: “We already have 10 customers.”

Reality: “We gave six of our original beta customers free licenses for six months and have two paying customers and two late-stage trials that we expect to convert soon.”

Have you already communicated in this manner? What you have to decide is how far to push these exaggerations. The investors expect you to be aggressive, boastful, and proud. And you might not actually get penalized for minor exaggerations here and there. But if you were to stack up all of the claims made above, you’re going to have a huge credibility problem on your hands. And that’s a negative hit to the desired enthusiasm transfer I talked about.

Outright lies

Like exaggerations, outright lies are discovered as investors dig deeper into your claims. They result either from something you think is a slight exaggeration but the investor begs to differ or from the way you answer their questions. Let’s use the example claim above about already having 10 customers. If the investor asks, “Are they actual paying customers?,” you have a choice. You can answer the way the reality statement was worded, or you can say “eight of the ten are paying customers.” That would be an outright lie, because six of them have a free license.

Eyeing a cash fume date that’s just around the corner can cause us to do crazy things that we would never do in more normal situations. But it’s not just your cash fume date that can cause these misjudgments in ethics. Desperately wanting to show that you accomplished what you said you would or being in the final push to get a funding round closed can offer the same tempting risk. Don’t do it!

Getting caught in an outright lie crosses an important line for many investors. If you’ll lie about one thing, why not many more? Building trust with your stakeholders (not just investors) is paramount to being able to call on them during very difficult times.

Nothing described here should cause you to be less bold, driven, confident, passionate, or unstoppable. Those personality traits are 100 percent compatible with building a well-oiled machine that is able to predict the future, achieve it, and do so with strong ethics and hugely loyal stakeholders.

•  •  •

Like I said in the beginning, early-stage fundraising is essentially a transfer of enthusiasm from founder to investor. Whether you see yourself as a salesperson or not, you are. And you’ve got to get proficient at it quickly. Your passion, drive, and ethical behavior will definitely get you pointed in the right direction. The rest of the skills and processes mentioned here come with repeated practice.

Gordon Daugherty

Gordon Daugherty is a seasoned business executive, entrepreneur, startup advisor, investor, and the best-selling author of Startup Success: Funding the Early Stages of Your Venture. A proud native Texan, Daugherty graduated from Baylor University. He has vast experience with early-stage fundraising from both sides of the table, making more than 350 investments and raising more than $100 million in growth and venture capital as a company executive, fund manager, board director, and active advisor.

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