Understanding How Investors Think

And what that means for you as a founder or VC newbie

A little over a week ago, I tweeted that there is a fundamental problem going on in Silicon Valley between black founders and investors—we don’t all speak the same language. After connecting with many first-time founders in the prior weeks, I realized that many simply didn’t know what they did not know with regard to metrics, storytelling in their pitches, and investor perspective.

And while this was something I had experienced my freshman year of college as a part of a startup team coming from Fisk, a small historically black college (HBCU), I hadn’t realized just how thick and expansive the barrier to information and communication could be.

After receiving a lot of comments and DMs of personal experiences with this very same problem I realized that it was an ideal time to directly break down these barriers with intentionality.

And thus, Venotes was born!

And considering the vast amount of information that is available out there, my goal isn’t to reinvent the wheel with Venotes per se. My goal is to share and breakdown the value in some of the content that already exists. If you follow me on Twitter (@jasminvests), you might have seen my recent write up of our Hustle Fund GP, Shiyan Koh’s webinar titled “What’s Going On In An Investor’s Brain?” Seeing the positive feedback to the write up and the webinar, I wanted to dive a little further from my perspective as newbie and intern which brings us to the topic of the week: understanding how investors think.

As a first-time founder or newcomer to the startup space, this topic is more valuable than many realize. If you understand the mindset of the investor you’re pitching to (or looking to work for), it’s much easier to cater your messaging and delivery to them in a way that they fully receive and connect with the story you are telling.

Understanding how investors think requires the following 3 key steps:

1. Understanding fund economics and dynamics

2. Understanding the investor’s style

3. Understanding the lingo of the industry

If you follow all three of these steps, conversations with investors are likely to go significantly smoother. But what do these steps really mean and how do you go about acquiring all of this info?

Let’s break it down.

Understanding fund economics and dynamics is all about understanding how a fund works, what a “VC-backable” business looks like, and why that matters. Often times people will use the term VC-backable or fundable to describe a business that has the potential to scale quickly—growing at incredible rates while achieving better profit margins as the size continues to rocket. Not every business is ideal for this and that’s okay. But, VCs are looking for a business that can scale because, it allows them to make returns for their investors (limited partners also known as LPs) despite the high failure rate of startups. It also allows them to get paid beyond management fees in the form of carry at the end of the fund’s life (20% of the return made for the LPs).

However, if they don’t return above a certain threshold in a fund, it’s likely they won’t be able to really raise another. Because of these factors, they are always looking for ways to mitigate or reduce risk and increase the likelihood of really big returns on individual investments. If you are new to learning about fund economics, Elizabeth Yin, our GP at Hustle Fund, recently shared this video explaining the math behind Silicon Valley’s famous love of “unicorns” and Harlem Capital recently shared this post also breaking down fund economics and the need for startups that can grow to “return the fund.”

But fund economics is only 1/3 of the battle.

It’s also essential to understand each investor’s style and approach to investing. While it’s easy to think that all angel investors, or all pre-seed funds are looking for companies with similar metrics or business models, this isn’t quite true. Outside of industry specialties and geographic limits, investors still have different investment theses, or beliefs about what kinds of companies are ideal for achieving certain returns.

At Hustle Fund, a core part of our investing strategy revolves around founders who are hustlers, especially those who understand their customer so well that they have effectively hacked the customer acquisition process and are able to better utilize their resources because of this. On the other hand, at the stage we invest, traction is less important. Some investors focus on writing small checks like us, whereas some care about being able to lead or take a whole round. For this reason, it’s important to do research by looking at firms’ websites and investors’ blogs, Twitter accounts, etc. so you save yourself some time if you aren’t a fit for them, or you are able to tailor your messaging and your pitch if you are.

Even if you have done all of the above, it won’t stop the issues that arise if you are unfamiliar with the lingo and terms used in Silicon Valley. And there’s a lot of them. Sergio Marrero of Rebel One shared this list of 100 VC terms. But wait, there’s more! Even outside of your traditional fundraising terms, there’s a whole lot of jargon around marketing, customer acquisition, customer retention, traction, and sales. Not only are these terms key for communicating with investors, they may open up doors to solving problems that you have had, but didn’t know how to quantify or solve. Luckily, if you are new to the world of KPIs, sales funnels and LTV, Elizabeth also shared some great content covering those terms this week.

Taking all of this information in is important, but putting it to use is even more necessary which is why next week I’ll be discussing the art of storytelling, pitch decks, and authenticity and sharing more of my favorite pieces, write ups, and resources on the topic.

Thank you for reading and feel free to comment or DM me (@jasminvests) on Twitter with your thoughts on this first piece!