One of the most odd things I’ve observed so far being on the investor side of the table is how much perception drives decision-making. Frequently I see deals struggling to raise money that have incredible traction (revenue, highly engaged users, contracted BD deals, whatever). It seems that the deals with the least amount of traction have the easiest time raising. This isn’t always the case obviously, but way more than you would think. It’s entirely counter-intuitive. I’ve been wondering why this is – why can an entrepreneur with literally nothing — No product. No revenue. No partners. No deals. Hell, not even a domain name or email address — able to raise so much money. I think because investors, particularly early stage ones, are investing in people as much, or more, than anything else, a lot of these deals are lead by passionate inspiring entrepreneurs.
You can’t argue with people investing in people, but I believe it’s more than just that. Here is the hypothesis I’ve come up with.
It’s rather simple and rather binary; investors primarily look at two sides of a deal to help make a decision: the positive aspects and the negative ones (obvious right). Well it is, but you would assume that they would look evenly at both sides to make a well-rounded decision. They might say, ok, this deal has a, b and c negative aspects but the deal also has x, y, and z positive aspects. But I think what happens is that investors tend to assign significantly more weight to the negative aspects of a deal with traction and conversely more weight to positive aspects for deals that have no traction. In other words, if you have traction, investors dig into the negatives. If you have no traction, investors dig more into the positives. It’s easier to justify that things “might” go well vs. bad when nothing is going well yet.
Sounds random; but I think its spot on. Certainly the end result is true – investors perceive deals with nothing to have better upside and deals with something to have larger downside.