Understanding Investor Psychology

Reflecting on my time as a VC, I acknowledge the significant role of instinct in decision-making. This was true not only for my personal decisions but also in discussions and decisions with my colleague’s investments.

As an investor, you meet hundreds of founders each year, but only a few will evoke a certain "feeling." This feeling is what makes you want to invest or not, so as an investor you are chasing that feeling constantly. 

Understanding this aspect of investor psychology is crucial to successfully fundraising for your startup. This insight can transform your approach to fundraising, allowing you to persuade investors to support your business.

This all comes down to how investors find companies, or what investors call internally as “deal flow”. Typically, deal flow originated from three areas:

1. Introductions from my network
2. Outreach from my personal research
3. Inbound interest due to the fund's reputation or my own brand

This is the essence of being a good investor, as without seeing a ‘flow’ of high-quality deals they will never be able to invest into the best companies.

At my previous fund, our primary goal was to review all available deals in the market. If we missed more than 5% of the deals, we considered it a significant failure in our KPIs for the year.

We did this, because if we focused on seeing every deal the market did, it meant that our success was defined by our own decision making to invest or not. If we didn’t even get to meet a founder we could’ve missed out on a great opportunity.

There is a significant fear of loss aversion to investors. They don’t want to miss out on potential deals. That being said, we also wanted to make sure we invested into the best deals. So being one of the first investors at the table was important to us. If we thought a deal had been rejected by everyone else, we questioned why the company had been overlooked. Most investors would question, "Is there something wrong with this company?"

It's crucial to make investors feel they are getting in on a deal early and that lack of rejection so far is a positive sign. Displaying desperation or anxiety during fundraising could lead investors to believe you've faced consistent rejection. They don't want to be the last to invest or pour resources into a company they perceive as widely rejected.

While this might seem irrational to you because you think it should always be about the company itself, the reasoning is quite simple: the market offers minimal data. An investor may like you, but they're dealing with many uncertainties. If they discover you've been turned down by hundreds of other investors, they may question whether they're missing something others have seen. This raises the concern: what if they're investing in the wrong company?

Secondly, every investor inevitably loses a deal to another investor. This usually occurs because they:

• Weren't quick enough
• Didn't establish a strong connection with the founder

It's tough when this happens, especially after you've spent over 10 weeks with the founder, only for them to choose someone else. For instance, I lost three deals to Atomico, a top-tier European investor. As a result, one of my key objectives was to secure deals before they could. If I identified exceptional founders and believed I had found a deal early on, I worked diligently to secure it before anyone else could.

When an investor comes across a deal, they often ask themselves, "Why am I seeing this company?" The response shouldn't be, "Everyone already passed on this, so the founder must be bad." Instead, it should be, "Wow, this is a great founder who I’m coming in early to. I’ve struck gold."

Understanding this investor psychology helps tailor how you:

- Get introduced to investors

- Present your company

- Update on your fundraising status

That's why warm connections and a strategic fundraising and communication process are so vital if you want to fundraise properly

This is just one part of getting an investor to "feel" like you are one of the 3-4 best founders they've met this year.  We go a lot more deeper into this and work on some exercises on how you think about this in my cohort-based course, The Fundraising Founder OS. Here’s a bit more info on it.