The human brain has an incredible ability to distort past emotional experiences. We can recall what we felt–angry, happy, sad–but not re-feel how we felt. This ingenious psychological immune system protects us from re-experiencing the intensity of painful memories. But, it can also insidiously drive us to chase the feelings of previous successes–often believing that repeating the exact or similar sets of behaviors will result in the same, intoxicating outcome. These emotional experiences carve pathways into our brain, reinforcing certain behaviors that we call instincts, gut feelings or sometimes, biases.

It turns out, investors are human too and not only subject to the same emotional imprints as the rest of us, but also highly reliant upon them. At this stage in my career, I've been through an acquisition, spin out, 5 venture funding rounds, a couple tranches of venture debt and an asset sale to a private equity company. While I've lost count of the number of investors I've interacted with, I have observed and been on the receiving end of their decisions driven by those instincts. The impact of those decisions are never more deeply experienced than when you need to raise money, which is where I thought we would begin our exploration of the founder-investor relationship.

What I’m not going to do is talk about how to construct your pitch—there are plenty of resources for that. Instead, I want to focus on everything outside the pitch deck: the other 95% of factors that influence fundraising success, from macroeconomic conditions and thematic investment cycles to how the confluence of these factors inform the emotional biases of investors. The underlying premise here may seem trite: while investors present themselves as rational actors their decisions are far from purely rational. How could they be? They’re betting on unproven ideas and, in many cases, unproven individuals or teams to not only overcome immense technical and business challenges but also to execute so well that they see a 10-100x return in the next 5-7 years.

Now, I know some of you may argue that portfolio construction mitigates this risk, as investors don’t expect every bet to be a home run—most will fail, with a handful carrying the fund. But that doesn't stop some investors completely overlooking facts and warning signals because they have concluded that the founder in front of them embodies the archetype of a Musk, Zuckerberg or Chesky–only to be met with a Holmes, Neumann or SBF. To paraphrase Daniel Kahneman, they are relying on instinct, gut feelings, and emotions while simply using the data they receive to confirm their biases. Therefore, I posit that venture funding is not just an irrational act, but that this very irrationality is essential to the process.

"[...] The dominance of conclusions over arguments is most pronounced where emotions are involved. The psychologist Paul Slovic has proposed an affect heuristic in which people let their likes and dislikes determine their beliefs about the world." - Daniel Kahneman

While the hypothesis may not seem particularly groundbreaking, what follows is where things get interesting. If you accept that fundraising is inherently irrational, it paradoxically allows you to create a systematic approach to it. By recognizing the sources that are tugging at the proverbial emotional strings of investors, we can start to build a structured framework of navigating the process. I believe these sources can be looked at in three general buckets:

  • The macro-economic and political climate that affects investor's own abilities to raise funds - think of it as everything upstream of the investor
  • How the VC firm's performance, fund age and thematic focus within the context of your own industry affect's how they will view you, prior to meeting - think of it as everything upstream of you
  • and finally, how upon meeting, 'vibes' confirms or challenges an investor's biases–this is all you.

It seems that we may have found our first rabbit hole within the broader setting of our 3-stage founder-investor relationship. Given not only the importance of fundraising as an act, but also the fact it's where the founder-investor relationship is first built, I think it warrants this slight detour.