Investors Want to Fund Execution, Not Exploration
The age-old question - What are investors really looking for?
Entrepreneurs often don’t really know what investors want, and investors don’t often share what they are looking for. Let’s end the confusion here and now. Investors want to fund ‘Execution, not Exploration.’ If there was one principle about understanding investor behavior that I would emphasize with growth-stage companies it is this one.
However, what exactly does that mean?
What that means is that most investors prefer to fund a management team that can execute on a strong plan. A plan which is already well underway and will lead to success. Investors want to ‘throw gas on the fire.’ They are less interested in funding an exploration or research project. Therefore, your goal as a CEO, is to get your company, business model, and marketing plan as much in the ‘execution’ phase as you can.
The more ‘executable’ your plan, the more ‘investable’ investors will view your company
And what really do I mean by exploration? Whether they know it or not, many growth-stage companies send an unspoken signal to investors that they are still in ‘exploration’ mode. That could be exploring product/market fit, target market, business model, go-to-market strategy, or a host of other key business metrics.
Now, before anyone gets upset. Let me be clear. I understand that - for many growth-stage companies - some level of business exploration comes with the territory. I fully understand that and have lived it myself. In most cases, there are most likely aspects of the business that are not yet fully developed - a new market segment, a new product, etc. Growth-stage investors understand this. Successfully navigating the unknown is one of the reasons this stage of investing can be so lucrative.
However, the idea that I am highlighting here is a little more subtle. Ultimately, investors are backing a management team’s ability to execute on a plan. Investors fully understand - and expect - that the plan can change. Growth-stage investing history is full of stories in which companies followed a strategy, hit a brick wall, pivoted, and ultimately succeeded in an unexpected way.
Investors hyper-focused on how management teams plan
Because of the inherent uncertainty of this stage of growth, investors are hyper-focused on the management team’s ability to formulate, evaluate, and execute on a plan. The more a management team can demonstrate that they have thought through the nitty-gritty details of a business plan, the more confidence investors will have. If an investor suspects, even a little, that management has not thoroughly thought through a process and is still exploring - they most likely will pass on an investment.
I have seen it over and over and over again. A management team confidently pitches their company and strategy. However, when it comes to due diligence or further conversations, it becomes very evident that the team has done very little work towards executing on, or validating any of the ideas in their plan. Many believe that the mere announcement of a plan, strategy or product is enough. I am here to tell you that it is not. Investors can often sniff out exploration mode from a mile away.
It is NOT the investors job to tell you how executable the plan Is - that is YOUR job
CEOs have to be ready to articulate a thorough, and well thought out strategy. There needs to be a complete go-to-market, with prospects identified, sales and marketing plans under way, etc. You get the idea. Regardless of what stage your company is in, the more executable these aspects of your company, the more comfortable investors will be. However, and I have seen this time and time again, it is often these vital details that are either in poor form or completely non-existent.
I have found that in numerous cases, it was not the business idea or target market that was the problem. The problem was that the management team was unable to articulate a credible executable plan (or there simply wasn’t one). Ultimately, that is why most investors pass.
CEOs must understand, the unfortunate truth is that if investors have to do too much work to understand the story (or believe it) – they will walk away. It is not the investors job to tell you why they passed on your investment or how you could improve upon it. They are too busy, and quite frankly – don’t care. The good ones offer feedback. Most do not.
In most cases, investors are going through a process of due diligence on several (and in many cases dozens) of companies at any one time. Fair or not, your company is not just being compared to the competition in your product market, your company is being compared to its competition in the investment market. If your strategy is not fully formed, and does not compare favorably to other potential investment ideas - you lose. Period.
The ‘best’ opportunity is not always the one that gets funded
This is an extremely important concept for CEOs - at all stages - to understand. In most cases, your company and your team will ultimately be evaluated by an investment committee. Perhaps you have met them all, perhaps not. When it comes to investment committee, investment ideas are pitted against each other. Unfortunately, the best idea, with the biggest target market, with the highest return potential, and with the most significant impact - is not necessarily the investment that wins.
Oftentimes, the idea that wins the ‘investment beauty contest’ is the one with the most fully-developed business strategy. A strategy that is well underway and is in execution mode.
If your company is still in exploration mode, most times you will hear some form of this statement from investors: “We really like what you are doing and would love to follow along with your progress. You are still a little early for us.” What does that mean? It means they have other investment opportunities that are further into execution mode than you are.
As a company, do yourself a favor. Make your company as far into execution mode as possible.
Not more, better
Most groups just want to meet more capital providers – which is understandable. However, if you are meeting with investors and not gaining traction there is possibly something wrong with the ‘company DNA’ that needs adjusting. My advice is to focus first on execution. Take an honest look at the business strategy, and adjust the plan and message in order to move the company further into ‘execution mode.’
Make that adjustment, get to execution, and the capital will most likely follow.
If you are a Founder or CEO, what is the next step?
If you are a Founder/CEO and are getting prepared for an institutional capital raise - you probably have a lot of questions, concerns, and potentially some self-doubt right now. Maybe you have a pit in your stomach at the thought of the raise process.
Here is the good news - great ideas paired to a great business are still getting funded. The challenge is to create an effective story. One that investors fully understand and can get excited about.
That is where we come in. We have created several Workshops to help your growth-stage company effectively engage with the institutional investor community.
© Copyright 2021 Marc Patterson/Bennu Partners. All Rights Reserved.
