The single most common question that I am asked by entrepreneurs and multinational corporations seeking to monetise their intellectual property is: “How do I get money?” They do not always ask the question in this way; sometimes it is hidden in the conversation, but the discussion invariably leads to funding.

The most jarring thing about this type of enquiry is the naivety with which the question is asked. Most professionals (particularly those who have worked for large blue-chip corporations) have no clue how investors think and act.

In start-ups (or corporate spin-outs), investors have a binary mindset. Although most ventures fail, many will become reasonably decent businesses that are acquired by aggregators later on. A very few become what is fashionably known as 'unicorns' – that is, they generate value of $1 billion or more. Unicorns are the lottery ticket that investors are looking for when they ask: “Can you scale the business?”

The things that drive investors to say 'yes' are elusive. But the foremost factor is the founder. A business plan without an impressive founder will not raise a dime. Thereafter, the market size and level of competitiveness are important, as is any evidence of progress or traction at all. The rest is just noise.

Daniel Kahneman has written about how people interpret data according to their biases. This is completely true in funding discussions. For those who want to invest in you, every data point in your presentation is a reason to do so. For those who thought 'no' 15 seconds after you sat down, the reverse is true. So, at least in the early meetings, the data points are meaningless.

Paul Graham describes the paradigm of a successful founder as “formidable”. This means someone who is not arrogant or aggressive, but who is justifiably confident. A formidable founder knows his or her industry inside out and can engage with investors at any level in exploring the pros and cons of the proposition. In my experience, a critical factor in being formidable is authenticity. Those who imitate what they believe successful founders do are caught in Graham’s “uncanny valley”, trapped between sincere and convincing and achieving neither. As the saying goes, if you can fake anything, you should start with sincerity. But investors are trained (and Kahnemen believes they have evolved) to smell those who lack real conviction along with fakes and bluffers.

It will sound strange, but the most powerful thing that a company founder (or indeed any business builder) can do is believe. Because if they do not believe, then no one else is going to. This means a lot of things. It means that they gave up their job/career/lifestyle to invest everything in their company. It means that they live and breathe their mission. It means that they do not take no for an answer. Because founders will hear 'no' a lot. 

Most investors are not domain experts, so they hire them as consultants to review new business ideas. Most domain experts are not entrepreneurs and almost none of them have any skin in the game. So the answer from every domain expert will always be 'no' or some form of qualified 'no'. Founders should not waste their time trying to engage with them to change their minds; they cannot. Consultants are not wired in the same way as entrepreneurs and have no incentive. The only thing founders can do is to provide every piece of information they are asked for in a timely fashion – as anything else looks like prevarication and is a red flag. But an expert report at best will be neutral (and I have read a lot of them).

Another big misunderstanding between money and management is what an actual investment signifies. For management, an investment is intepreted as meaning that the investor has approved the business plan and model, believes in their success and supports the terms of the financial deal (whatever that may be). For investors, however, the reality is different. An initial investment (no matter how big) simply means that the management has satisfied them that they are investable. So a deal is cut that provides an initial risk/reward that suits the investor and the capital that it has on hand at that time. If the business turns out to be a winner and requires growth capital, then the conversation changes to a different one based around the fact that the business is no longer merely investable, but that it might also have a chance to become successful. The terms, conditions and incentives around that conversation are often different. Founders often interpret this second round as “retreading the deal”. Not really – it is just the next logical step.

An inconvenient truth is that a primary driver of success (aside from formidable founders and a tight backing band) is luck. Timing, deregulation, a wave of demand that a business can ride to grow to a steep hockey stick. This is something that Nassim Taleb has written a lot about and it is true. It is not wrong to recognise this upfront, because investors know this. Without luck the chances of becoming a unicorn are remote, irrespective of the business plan.

For larger investments, some form of asset-backed deal is comforting. The idea that investors are buying a business that they could exit in a fire sale is a fundamental part of their risk decision. Recently, much has been written about the potential of intellectual property to be part of this fire sale estate. It can happen, but it is rare. Too many founders fail to understand this trade-off as they seek pre-money valuations that erode any such investor protection from the start. The rule of thumb here is that for first money in particular, take as much as you can get at whatever valuation you can get it, but retain control.

Notwithstanding all of this, 99% of investors will say no. That is because the herd mentality pervades the investment community (which is the basis for the time-proven investment strategy of trend following). Ironically, the best investors usually buck the trend, but you have to find them and they are not always known. History is replete with examples of winners who were rejected. The Beatles are perhaps the best-known example, but everyone from Apple to Genentech was laughed out of investor meetings. 

Therefore, the take-home message for those contemplating a new venture is to prepare for a long haul on the way to overnight success and understand that most investors are tourists. Cut your fixed costs, invest in your vision and keep the pitch simple. Guy Kawasaki has it right: have 10 slides, use 30-point font and be yourself.

If you have a business or an idea of real value in an expanding market, and if you believe in it completely and can articulate it authentically, you will succeed. Eventually. With luck and time. And then you will be an overnight success.

Chris Donegan

This article first appeared in IAM magazine. For further information please visit