Securing angel investment is a crucial milestone for most early stage startups. Yet too often in the excitement, passion and drive of telling their company stories, a crucial factor is overlooked – the perspective of the audience (namely the angel investor).
Understanding the psychology of investors is essential in a world where global venture funding has almost halved in the past three years. Being able to walk in the shoes of an investor can give startups the edge in gaining funding in a hugely competitive market.
So before embarking on putting together the first slide of their deck, startups need to first think about the motivations, decision-making processes, and emotional drivers of angel investors. This will dramatically increase their chances of winning funding.
Who are Angel Investors?
To begin with, startups must understand who angel investors are and how they differ from other sources of funding. Angel investors are high-net-worth individuals who invest their personal capital in early-stage ventures. They come from diverse backgrounds, often with experience as entrepreneurs, executives, or professionals in specific industries.
Unlike venture capitalists, who manage funds from external sources, angels invest their own money. This makes their decisions highly personal and influenced by a range of factors beyond pure financial analysis. There are several motivational factors that drive their investment choices.
The emotional connection
Investors are more likely to invest in ventures that resonate with their personal experiences or values. A parent might be drawn to a tech product that makes parenting easier, while someone affected by a specific illness could be passionate about funding related medical research.
Tapping into these emotional connections is crucial when targeting the right angels. If founders have researched their investors well, they should have the information needed to connect with them on a personal level.
Clearly articulating the problem being solved and demonstrating its personal relevance can significantly enhance any pitch. Founders who show a deep, empathetic understanding of a consumer or business pain point will have a much better chance of making their business idea stand out.
Intellectual stimulation
While the potential for high financial returns is crucial for investors, startups must remember that angel investors are often motivated by the opportunity to mentor early-stage companies. In fact, a recent survey of investors in our network highlighted this as a leading motivational factor. Angels are drawn to innovative ideas that allow them to share their expertise.
Founders should actively leverage this by identifying how their angel investors can add value beyond capital alone. Clearly outlining areas where guidance is needed and finding ways to engage their backers will be far more effective than treating them purely as sources of funding.
The power of less: Leaving them wanting more
Providing less information in an initial pitch can often be more effective than overwhelming investors with too many details. The human mind is naturally curious, with a desire to learn more and fill in gaps. By presenting a concise and compelling overview, founders can pique investors’ interest and encourage them to delve deeper.
Certainly, one size does not fit all when it comes to pitching angel investors. Startups should tailor their approach based on the investor’s background and expertise. This means always putting themselves in the investor’s shoes and considering how the pitch will be perceived from their perspective.
For example, when pitching to an investor with deep industry knowledge, founders should focus on the “how”—the technical details and underlying technology—since the investor may well be a subject expert. However, when pitching to a layperson, they should avoid being overly technical too early, as this could confuse the investor and cause them to lose interest.
Developing multiple pitch decks tailored to different investor profiles is a highly effective strategy. By understanding their investors’ interests and areas of expertise, startups can significantly improve their chances of capturing their attention.
The psychology of scarcity and FOMO
When approaching the startup investment process, it’s important to view it as a sales funnel. Too often, fundraising is given an air of mystique when, in reality, it follows the same principles as any sales process.
Investment seekers need to identify a need or pain point and present a solution. Like all humans, investors are susceptible to psychological biases.
One particularly powerful bias is the fear of missing out (FOMO). By creating a sense of urgency and highlighting the potential for significant returns, startups can leverage this bias to their advantage.
- Lead Investor: Securing a lead investor early in the process can significantly boost investor confidence and attract additional angels.
- Deadlines: Setting a reasonable deadline for closing the funding round creates a sense of urgency and encourages investors to make timely decisions. This approach is similar to marketing tactics that use limited-time offers or exclusive deals to drive engagement.
The funding funnel: A strategic approach
The key to a successful startup investment funnel lies in effectively progressing through each stage of the process. Typically, this funnel consists of four key stages:
- Interest: The initial pitch aims to capture the investor’s attention, spark their interest, and ideally, secure a follow-up call or meeting.
- Follow-up: Subsequent meetings and discussions provide more detailed information, address specific questions, and build a closer relationship with investors.
- Consideration: Once founders have answered investors’ questions and provided enough information, they must determine how serious the investors are about making a commitment.
- Investment: The final stage involves finalising the investment terms and securing the funding.
Each stage requires a tailored approach, with the primary objective being to advance to the next level. It also involves strategically deploying the right team members at the right time. For example, a technical lead may not be the best person for the initial pitch but could add significant credibility during a deep-dive technical discussion.
Ultimately, startups should remember that investors are people with their own motivations, biases, and emotions. By understanding their psychology and tailoring their approach accordingly, founders can significantly increase their chances of securing funding and building successful partnerships. While investment is a financial transaction, people remain at the heart of it.