Why Investors Love Imagination More Than Numbers

In the world of entrepreneurship, there is a well-known paradox that often leaves founders scratching their heads: raising money when you have zero revenue, zero customers, and zero traction versus when you have a small amount. Many investors seem more willing to invest in a company that is just starting out than in a company that has already taken some initial steps towards success.

I came across this while reading the book “The Lean Startup” written by Eric Ries. The book has had a significant impact on the startup community, encouraging founders to take a more scientific and iterative approach to building successful companies. Eric focuses on the idea of “validated learning,” which means testing hypotheses and learning from customer feedback in order to improve products and services. The Lean Startup methodology encourages startups to develop a minimum viable product (MVP) and then gather data on customer response before investing further resources. This approach helps startups to avoid wasteful spending and focus on creating value for customers.

Counterintuitive

At first glance, the paradox may seem counterintuitive. After all, shouldn’t a company that has demonstrated some success be more appealing to investors than one that is still in its infancy? However, upon closer examination, the answer becomes clear. When you have zero revenue, zero customers, and zero traction, you have the luxury of imagination. You can present your idea in its purest form and paint a vision of what it could become. You have the freedom to dream big and take risks without being held back by the constraints of your current reality.

In contrast, when you have a small amount of revenue, customers, and traction, you invite questions about whether those numbers will ever grow to be large enough to justify an investment. Investors start to scrutinize your business model, your marketing strategy, your team, and your execution. They want to see concrete evidence that your business is on a trajectory of success.

This paradox is particularly evident in the world of startups, where the focus is often on growth and scalability. Investors want to see exponential growth and a clear path to profitability. When a company has already taken some initial steps towards success, it can be harder to demonstrate that kind of growth potential.

Of course, this paradox is not absolute. There are many examples of successful companies that have raised significant amounts of money despite having already achieved some level of success. However, the irony remains that it can be easier to raise money when you are just starting out than when you have already made some progress.

Innovation & Imagination

So what can founders do to navigate this paradox? One approach is to continue to focus on innovation and imagination, even as your business begins to grow. Keep pushing the boundaries of what is possible and maintain a clear vision of where you want to go. Communicate that vision effectively to investors, and demonstrate how your current success is just the beginning of something much bigger.

Relationships with Investors

Another approach is to focus on building relationships with investors who understand your business and share your vision. Look for people who are passionate about your idea and who are willing to take a risk on your potential, even if your current numbers are not yet where you want them to be. Here are some tips for building strong relationships with potential investors:

1. Research potential investors: Before reaching out to investors, do some research to learn about their investment history, areas of interest, and preferred investment stage. This will help you identify which investors are the best fit for your startup.
2. Build your network: Attend networking events, conferences, and meetups to connect with potential investors and other entrepreneurs. Build relationships with people in your industry and share your startup story.
3. Make a great first impression: When you meet with potential investors, be prepared, professional, and confident. Have a clear and concise elevator pitch and be ready to answer questions about your startup.
4. Share your vision: Investors want to see that you have a strong vision for your startup and a clear plan for achieving your goals. Share your vision and explain how your startup will create value for customers.
5. Be transparent: Investors want to work with founders who are honest, transparent, and trustworthy. Be open about your successes and failures, and share your plans for addressing any challenges.
6. Keep investors informed: Once you have secured an investment, keep your investors informed about your progress. Provide regular updates on key metrics, milestones, and challenges.
7. Maintain relationships: Building relationships with investors is an ongoing process. Stay in touch with your investors even after the fundraising process is complete. Keep them updated on your progress and ask for advice and guidance when you need it.

The key for founders is to stay focused on their vision and to find the right partners who share that vision and are willing to invest in their potential.