The Catch 22 between Entrepreneurs and Investors

Entrepreneurs face a new obstacle everyday in business. Raising capital to fuel their companies is one of them. Early stage companies face many challenges and sometimes Venture Capitalist which are supposed to be a guiding light exacerbate the problem. 

Founder and CEO of Localeur, Joah Spearman, expressed this frustration on a LinkedIn post. After pitching nearly 100 individuals and firms across the U.S. in cities like Austin, Silicon Valley, and New York. He realized the disconnect between investors and entrepreneurs, especially those of color.

The disconnect between investors and founders manifested in different ways throughout his journey. Some ignored kind greetings and wouldn’t take meetings. Closed off nature of VC’s of wanting to be introduced to founders instead of cold intros. 

Other investors took meetings only to talk without listening to the pitch. Disregarding information about companies defeats the purpose of meeting. For every problem there is a solution. 

Dealing with preconceived notions is difficult yet possible. Listen not to reply but to understand their concerns and then speak. It is imperative for founders to listen to successful entrepreneurs who have already done acquisitions and IPOs. However there needs to be a balanced communication. Understanding and progress has to be on both ends.

The Internet, especially social media has created a smoke and mirrors effect. It has made it easier for scammers and frauds to create a facade. Fake followers and engagement inflates the numbers companies use to decide whether they want to partner up. How will investors know the difference if they are not willing to have an in-depth conversation? 

Few VCs gave positive feedback initially, but eventually ended up ghosting Joah without saying no clearly or providing any constructive criticism. Fear of risky should never overrides groundbreaking ideas.

What founders need is transparency and honesty from VCs about what they think about their particular business. There is nothing wrong about passing up an opportunity to invest. All founders ask is that investors explain why so moving forward we can improve. Founders need practical advice on what they need to do to be better. VC’s want to see MVP fully developed before investing.

In my experience investors have expectations that anything under a million is to be funded by founders,  friends and family. Anything else comes from people who don’t know me but think me or my idea is cool. There must be clear communication about the value of money vs quality ideas; increasing the balance between creativity and productivity.

Micro-influencers or trendsetters sometimes need capital to keep up with product demand. Orders to fulfill become larger than supplies available. In this situation, investors are the key to scaling their business. Bridging the gap between cultural influence and money is a win-win on both ends.

Most of the time founders will give a vague less confrontational reason to their actions. They don’t want to completely write off a chance to invest because later on after more development, the company may be a big success. No right now is not necessarily a no later. 

Pay to pitch style programs are uncommon and yet have started popping up in various cities. This kind of exploitation of founders is absolutely unacceptable. Money used to enter these programs has better use being reinvested into companies.

It reminds me of the show Shark Tank. In most cases investors are honest and fair. There’s always one wonderful wolf in sheep’s clothing. Waiting for a desperate founder to take any bait put in front of them.

Fall for the bait and find yourself in a deal that’s a win for them and lose for you. This is not to demonize investors. Part of the blame goes to entrepreneurs if they agree to bad terms.

All of these different scenarios are related to a similar mindset within the investors. Typically it has to do with their own motives and intentions. Ulterior motives not for the founders harm, but for their best interests. 

Rule of thumb for entrepreneurs 

What entrepreneurs can do is get better at approaching investors. Make sure you get an introduction from a credible person, preferably someone who has already gotten an investment. For underprivileged entrepreneurs they may not have the resources. They can still do research and make sure the investors experience aligns with their company.

Know who you’re dealing with

Investors like to work with companies that they are familiar with the industry. If they’re successful in retail they most likely will not get into cyber security. They have the resources to help but not the experiences and knowledge in that field.

Angel Investor or Venture Capital?

Deciding on the method/vehicle of investment is also extremely important for entrepreneurs to be aware of. If your idea is still within pre-seed stage, an Angel investor (or several) would be a smarter decision over chasing a venture capitalist. Angel investors typically invest anywhere between 100,000 -1,000,000 dollars into projects. An angel can assist with getting the product off the ground and running. Venture capitalist, on the other hand, like to see growth with a company before investing. VC’s add fuel for operations to reach a new level.

Over prepare for Due Diligence 

Due diligence is one of the most grueling and time consuming processes. The Information Age has added more pros and cons. Infinite info is available on the internet, both real and fake. 

Analytics and automation has made it possible to sift through data to reach prolific conclusions. Sometimes the presentation of entrepreneurs can mislead investors to believe they’re not prepared to lead a company and vice versa. 

In a digital era, there’s vital miscommunication and misunderstanding between the expectations of investors and the founders reality. The only way to solve is to have an open dialogue where both sides feel free to express themselves.