Credits: Desri Tate
“Emotion trumps logic.”
Investors do not make funding decisions rationally. Take the time to understand investor psychology and your startup will be at an advantage in the funding game. First, you have to know what drives investors positively and negatively. Second, its not about money for investors. And lastly, you aren’t there to sell your product. On the positive side, investors are driven by the need to be ahead of the trends, to be part of something amazing and they are looking for a great experience. They are searching for an emotional experience they can’t get anywhere else. On the negative side, they are risk and loss averse. Wikipedia defines loss averse as, “the tendency for people to strongly prefer avoiding losses than acquiring gains. Some studies suggest that losses are as much as twice as psychologically powerful as gains.” Investors, especially angel investors, have higher risk yet fund companies 10x more than venture capitalists. Since angel investors fund only a few startups, each of those startups are a high risk for them, meaning, your company is also a high risk. How can you use these two differing perspectives to your advantage? Why is it that despite a higher risk for angel investors, they still fund more companies than VCs? By offering investors an experience so enthralling, investors are willing to forego their fear of failure, shame and loss. The experience is what matters to investors, not the money. Geoffroy T. Roach states in Angel Investing: A Case Study of the Processes, Risk and Internal Rate of Return:
“Angels may invest for reasons other than solely economic gain and are not rational investors from the perspective of many economic theories…The second reason is the satisfaction that one feels from being involved in a startup business…Angels see themselves as investors who play an active part in the company.”
If you allow investors to take part in your company, that experience of being part of a rich experience will overcome their fears. Here are words directly from angel investor Ron Conway:
“It’s not about the money. For me, it’s one simple word: Because it’s interesting. Angel investing is the most interesting thing you will ever do. If I could, I would convince you in seven minutes to take the leap and start angel investing. Because if you talk to an entrepreneur, and they are starting a company—usually, there are about four cofounders in each new company—you get to listen to those entrepreneurs tell you what is going to happen in the future. Entrepreneurs are a crystal ball telling the technology industry where it’s going to be in four to five years. There cannot be anything more exciting and interesting than being part of that. I’m just completely addicted to it. There is no way I’m going to stop.”
Angel investors, like Ron Conway, enjoys experiencing the passion and conviction of entrepreneurs. However, trust is paramount in acquiring funding from an investor. Ron Conway states that he invests in entrepreneurs first rather than their ideas. There’s no doubt that someone else can create a better product than you but what stands out is you. What is being sold is you and trust, not a product.