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Dr. Earl R. Smith II
Very few entrepreneurs take the time to really study their company from the perspective of an investor. Those that do are often initially frustrated by what they see as a heartless and antiseptic assessment of the object of their passion and dedication. But, if they fight through those self-justifying tendencies and come to understand the investors perspective, they can substantially improve their chances of fathoming the process and, perhaps, of getting funded. The investor’s world is quite different from the entrepreneurs in many ways. But there are also similarities.
The most notable of these similarities is the fact that investors, much like entrepreneurs, make decisions in anticipation of a future which may or may not actually come to pass. Investors know that projections of future results are not the same as future results. They know that estimates are just that. The best investors use all their skill and judgment to make investments that will have a high probability of generating a very significant return. But, no matter how good they are, none can truly see the future.
Investors, like entrepreneurs, plant a flag every time they commit resources. They decide to put down a marker on this technology, with this team and on these terms. Once they have committed, they do everything within their power to help their investment pay off. In doing so, they are taking significant risks. They expect very significant profits in the form of a high return on investment (ROI). Like entrepreneurs, they are in it for the payoff.
Venture capitalists tend to be industry specific. Much like entrepreneurs, they focus on industries that they know. Many investors pick an industry focus because of personal experience, education or the anticipation that it will provide good opportunities for profit. Most entrepreneurs to do the same.
Both investors and entrepreneurs are focused on building a reputation for success. Investors realize that their ability to raise subsequent funds will depend of the success of their current portfolio companies. The most successful venture capitalists have built a reputation for picking winners. As a result, they have raised a series of funds involving increasingly larger amounts of investment capital. Many entrepreneurs also look beyond their current company. They realize that a reputation for success will make it easier to fund a second or third company. These recidivist or serial entrepreneurs see their career over decades and as involving multiple companies.
The similarities pale in comparison to the differences. Bringing entrepreneurs and investors together is a lot like mixing oil and water. No matter how vigorously you shake the bottle, the mixture will, in time, separate out. But the fact that mixing these two perspectives is difficult does not mean that it should not be attempted or cannot be done. Both sides make efforts, some successful and others not, to understand where the other is coming from. Investors tend to see a lot more entrepreneurs than entrepreneurs see investors.
From my experience, the short-comings that often make the meeting of minds so difficult come from the founders. They simply do not put in the time and energy to understanding how investors think and what they consider a quality opportunity. The worst offenders are ones who rail against investors as stupid, lacking creativity, manipulative or arrogant. It is not just that this attitude, which you can track with a simple Google search, is insulting. For most investors, it reduces their interest in backing a venture involving such people and attitudes to zero.
My goal is to outline some of the differences between investors and entrepreneurs. My hope is that, by laying out some of these differences, I can help entrepreneurs better understand the vision and objectives of investors. Here are just a few of those differences:
Investors tend to spread their risks over a portfolio of companies. Even though they might group them within a particular industry, their approach to risk management leads them to invest a percentage of their funds in a number of companies. Unlike entrepreneurs, who have bet on a particular value proposition, in a defined market and with a specific team, investors diversify as a strategy. They protect themselves from losing all their funds because of one wrong decision by making a number of bets.
Here is how the average investor looks at the issue of risk management. Say they make ten investments over a period of two or three years. Their expectations are that at least two or three of them will prove very successful. The rest will fall into one of two categories. Either they will prove to be a total bust (and therefore written off) or limp along without managing the growth that was initially projected. The latter category is the most expensive for investors. They will need to become more involved in oversight and finding a way out of the investment. This approach to risk management is in sharp contrast to the entrepreneur who makes his bet on a specific technology, value proposition and team. Investors are more risk averse than founders.
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