A Better Way to Grow Capital. Create Lines, Not Just Dots - a Classic on Investor Engagement from Mark Suster
More is not ALWAYS the Answer
The most common request that I hear from Growth-Stage Founders and CEO’s is ‘More, More, More.’ I want More. I want to meet more investors. My company needs to meet more Private Equity funds, Venture Capital funds, Family Offices, Wealthy Entrepreneurs, etc.. Does that sound familiar to anyone else?
Listen, I get it. There is nothing wrong with more. We all need to constantly increase our network reach. However, more is not ALWAYS the answer. Many CEO’s that I meet have plenty of potential investors and strategic partners already in their network. In many cases, they have actually already met with those individuals.
Strong Relationships Engender Greater Dialogue and Higher Levels of Trust
One piece of advice that I end up giving over and over again is to spend just a little more time and intention around building deeper relationships with the potential investors that you already know. Spend some more time upgrading the quality of the relationship, and subsequently, upgrade the quality of the dialogue.
There are plenty of reasons why investors pass on a deal - and many investors are not always transparent as to why. Perhaps spending a little more time finding out why could help. Through higher-quality dialogue, perhaps we can discover small adjustments or upgrades to the company that will compel an investor to write the check. In the end, investors back companies and management teams that they trust. Without a strong relationship, it is really, really difficult to gain trust.
Lines, Not Dots
I wanted to share one of the classics on growing capital that I find myself going back to over and over again from early-stage investor Mark Suster titled “Invest in Lines not Dots”. It was written and posted a decade ago. However, I find the message to be timeless. I find that this simple concept continues to pop up in many conversations that I have with entrepreneurs – particularly those that are in the midst of raising growth capital. It continues to be enormously relevant.
I am constantly surprised (and dismayed) at how few groups actually follow through on this advice. The truth is, the concept is simple to grasp. The reason that so few groups do it well is because it is hard work. It takes commitment, discipline, and constant follow through. In other words, persistence and grit. Two things that are often a challenge. But I don’t want to throw stones at a glass house. It is something that I am always trying to get better at myself.
I would recommend reading the entire article. Here are a few direct quotes from the article that I find particularly important:
“The first time I meet you, you are a single data point. A dot. I have no reference point from which to judge whether you were higher on the y-axis 3 months ago or lower. Because I have no observation points from the past, I have no sense for where you will be in the future. Thus, it is very hard to make a commitment to fund you. For this reason I tell entrepreneurs the following: Meet your potential investors early. Tell them you’re not raising money yet but that you will be in the next 6 months or so. Tell them you really like them so you want them to have an early view (which is what all investor’s want). Most importantly tell them what you plan to achieve by the next time you see them. Hopefully by then you’ve made good progress.”
“In normal times investors will look for “traction” before investing. We want to make sure we’re in love. This sometimes frustrates entrepreneurs who just want to “get back to running the business.” But if you understand it you’ll see that it is perfectly rational and it should also influence how you form relationships with investors. And remember, if we get married you’re stuck with us, too.”
“I know VCs and sophisticated angels can be difficult, slow and price sensitive, but I also know that in tough times unsophisticated investors can be a right pain in the arse. For some companies — they become deal breakers on further funding rounds. By definition if somebody is investing in you as a dot (limited thought, limited due diligence, maximum price) they are a dot to you, too. You can’t really know them in 2 minutes yet you’re letting them own part of your business.”
I have been in the investment and finance world for over two decades. Oftentimes, it feels as if I am perpetually raising equity and developing relationships. It can be frustrating and exhausting. I can honestly say that I experience the need to build lines with relationships and investors every single day. This particular article is focused on entrepreneurs raising capital for their firm. However, I think it is applicable to pretty much any business. It is certainly applicable to private equity and venture capital funds as well.
This has become one of my go-to pieces for anyone that is in the business of building an LP base. So often we obsess over ‘closing the deal’. However, the truth is that the process is often lengthy, time consuming and tedious. It is an important thing is to give your potential partners the opportunity to follow your progress over time. And unfortunately, that takes time.
Added Bonus - Deeper Relationships Help You to Filter Out Bad Investment Partnerships
Don’t forget that there is another side to the coin - relationship building is a two way street. We are impatient by nature and want to get that new LP signed, or that new client onboard. However, taking it slowly can give you more time to get to know them as well. Investing is often a long-term game. It’s better to really get to know the people you are going to be spending that time with.
There is no getting around relationship building. There is absolutely no other way to build trusting, long-standing partnerships. Knowing that, take it seriously and make it a daily habit within your business.
(C) Marc Patterson 2020
