Entrepreneurs face a journey filled with daily challenges and victories. One major obstacle they encounter early on is securing funding. To succeed, they must understand the mindset of investors and how their processes work.

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Possible conflict of interests

It's essential to realize that investors, like entrepreneurs, have their own backers, and their reputation and success rate are crucial. Both investors and their backers share a common dislike for risks. This often leads entrepreneurs to misunderstand the motivations of investors, as their perceptions don't align with the reality of this risk-averse approach. Investors and entrepreneurs operate with different motivations and thought processes. Investors strongly dislike risks, while entrepreneurs embrace the entrepreneurial lifestyle as a daily part of their existence. This difference is crucial in understanding each other. For entrepreneurs, success often means a singular venture that leads to a sought-after exit. This exit serves as a transformative financial milestone for the entrepreneur. In contrast, investors operate within a more stringent framework, needing a consistent streak of success. Failure to show this may label them as a "one-trick pony," highlighting the need for sustained achievements in their portfolio.

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Not everything is related to interests

Recognizing that not every situation revolves around shared interests or conflicts is crucial. As Sigmund Freud wisely pointed out, "sometimes a cigar is just a cigar." In simpler terms, the hesitation to invest may not always stem from conflicting interests but could result from a lack of personal connection to the idea or the team. It might even be influenced by past experiences or traumas that investors carry from encounters with similar ideas or teams. Understanding these nuances is key to navigating the intricate landscape of investments and building meaningful connections with potential backers.

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Ways to align the interests

Entrepreneurs can play a crucial role in easing investors' concerns and speeding up the investment process by taking proactive steps before approaching them. This involves a thorough validation process that can enhance the chances of success. While the journey may seem challenging, it is worth the effort.

Here's a simple yet effective path: Entrepreneurs should connect with a significant number of professionals (the more, the better) relevant to their idea. Presenting the idea to these individuals and seeking their feedback, ideas, buy-ins, and commitments can provide valuable insights. Although this discovery process is demanding, it helps entrepreneurs identify the right metrics to validate their idea and understand important concepts like Product-Market Fit (PMF), Ideal Customer Profile (ICP), and Annual Contract Value (ACV) that investors often value.

Surprisingly, all the hard work culminates in a single slide during the investment presentation, a slide that can make or break the deal. This slide typically answers the crucial question for investors: "Do I want to explore this company?" The content of this slide includes logos—the logos of professionals who have not only met but also agreed to be referenced. Sometimes, these logos are grouped based on the depth of the relationship created.

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The power of validation

Entrepreneurs can encounter various levels of commitment from references when seeking validation for a business idea. These commitments can range from a simple nod of approval to more substantial support. Here's a breakdown of the different levels of commitment an entrepreneur might expect from a reference:

Acknowledgment

At the basic level, a reference may acknowledge the idea and express interest in hearing more. This initial acknowledgment is a positive signal, showing that the concept has piqued their curiosity.

Feedback and Ideas

A reference might offer constructive feedback and share valuable ideas after reviewing the business concept. This level of commitment indicates a willingness to engage with the idea on a deeper level.

Buy-In

Achieving buy-in means that the reference not only understands the idea but also believes in its potential success. They express genuine support and enthusiasm for the concept, signaling a higher level of commitment.

Commitment to Act as a Champion

Some references may go a step further and commit to championing the idea within their network. This involves actively endorsing and promoting the concept to others, leveraging their influence to create more opportunities.

Financial Commitment

In some instances, a reference may be willing to make a financial commitment, either as an early customer, an investor, or by helping secure funding from their network. This level of commitment is a strong indicator of confidence in the idea's viability.

Long-Term Partnership

The highest level of commitment involves a reference expressing interest in a long-term partnership. This could involve collaboration, mentorship, or even becoming a strategic partner in the venture. Understanding and categorizing these levels of commitment is vital for entrepreneurs. It not only helps in gauging the depth of support for the idea but also provides valuable insights into the potential success and scalability of the business. Entrepreneurs can leverage these commitments when presenting their ideas to investors, demonstrating a solid foundation of external validation and support.

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To conclude

In entrepreneurship and investment, the validation phase stands as a cornerstone, so much so that investors dedicate considerable time to scrutinizing the meticulous work done by entrepreneurs. Recognizing the paramount importance of this phase, entrepreneurs are likely to find value in dedicating extra effort to a) honing their focus on the validation process, b) comprehending investors' need to delve deep into this information, and c) preparing their validation references for thorough and meaningful conversations. These discussions can cover crucial aspects like pricing, implementation, commitments, and the nuanced facets of both the product and the team. Embracing the significance of validation not only fortifies the entrepreneur's position but also lays a robust foundation for a successful and transparent partnership with potential investors.

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About the author

Ron is the Chief Technology Officer of AnD Ventures,  an early-stage VC investing in extraordinary people & frontier technologies based in Herzliya. Before AnD Ventures, Ron was the Founder & CTO of L1ght company that has created cutting-edge technology designed to save children’s lives by detecting online toxicity and dangers to children (e.g., shaming, bullying, self-harm, pedophiles, predators, and more). Before that, Ron founded, headed, and sold several high-tech companies in the cybersecurity arena.

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