There are a lot of entrepreneurs who do not think of investors as people. Instead, they make a fatal error which is thinking that investors are money.
You can’t consider private investing as just like picking a stock on NASDAQ. Private investing is personal. Investors have goals, preferences, fears, and problems, just like entrepreneurs. When they are cut, they bleed. When something goes wrong, then they worry. So, the relationship you build with investors is essential to obtaining money from them.
In the most simple terms, investors can be put into two categories: Subjective and Objective.
In the subjective category, the investor is described as one who is somehow emotionally connected to the entrepreneur or the company and its product or offering. They know the entrepreneur directly or through a third party so they have a comfort level regarding the entrepreneur’s ability to perform. They could also be familiar with the product or more specifically the need for the product and wish they had thought of it or could have bought one a year ago. These investors typically get involved at a very early stage and may even be in the friends and family round. They may be accredited, but they may not. Because of the emotional connection, they are more forgiving of missing elements to the business plan or business model. They want to invest and look for reasons to invest, to justify their emotional decision.
When it comes to an objective investor, he is in the business of investing. Due to the fact that they have many projects they are considering investing in, they therefore look for reasons to invest. For instance, they have to eliminate at least 3 to narrow down their choices if they are considering 5 projects and trying to make a decision. In other words, things that are incomplete are what they are looking for. As for the business that is difficult to read or understand, it is also the easiest factor to use. The financial projections are unrealistic or incomplete because they use some standard formula rather than real data, so the investor knows that entrepreneur is just “guessing”. The other big cause for elimination by an Objective investor is that the company has an inadequate plan for execution once the money is received. Their use of funds is vague and also they haven’t completely figured out what they will do with the money. What an Objective investor want is not to have their money used to “figure stuff out” but rather they want it to go directly to activities that will help the company scale and generate revenue, and can be measured through milestones or project plans.
It will ultimately be an emotional decision for the investor to actually write the check. If you are seeking serious investor money and if you have flaws in your business plan or business model, then you won’t get to the point where the investor can make the decision to invest.