Step 14: The Pile-On Effect - We Smell Blood! And, Some Notes About Investors
It sounds dumb that potential investors would put so much weight in what others think, but don't underestimate it. People are busy, and if they can look to someone they trust or respect for an opinion, it saves them having to deeply think about it themselves. That sucks because we should all be evaluated on our true merits, but at least knowing this gives entrepreneurs an edge in evaluating investors.
When I was pitching Instructables, I read everything I could find about how to deal with investors, how to best pitch, how to make a great first impression, etc... with the best of the bunch coming from my friend Nivi's site Venture Hacks. My synthesis of the full body of work is this: There is no single best strategy, and no one really knows how to do it. Investors are just people, and while an obscene number of them seem to actually like Sand Hill Road and its boring plain office parks, they each have different opinions and methodologies. Some will make decisions based on an analytical by-the-numbers (even if they're fabricated!) approach, while others will determine if they like as you as person. Both are valid approaches, and both may have worked in the past, effectively validating them further. So, advice from one investor may be totally inappropriate when talking to another. Sarcasm and cynicism aside, while pitching, I met a large number of highly-engaged intelligent people that truly wanted to build great businesses, and that was fun in and of itself.
Dating analogies apply: There's no single best way to find and attract someone for romance, and the same is true for investment. It may seem like non-advice, but I believe the best approach is to treat people as you'd like to be treated. Tell your story in the same way you'd like to hear it, being honest about both your optimism and your fears.
While each investor may be a unique and beautiful snowflake, it's important to realize that they all are looking for a return. That return might come in the form of money from a public offering of your company, an acquisition, or even dividends; it might also come from the prestige of being an owner of a highly successful company. If you do choose to take investment, make sure you're really clear on the investor's return expectations and timelines. For reference, I've heard all sorts of expectations such as 2x in one year to 10x in seven years, which I convert to compounded annual interest to compare (100% and 39% respectively). A good understanding of the desired return will help you determine type and size of investment, and guide you to think rationally about generating that return (euphemistically, the exit!).