Emotional intelligence and startup fundraising (“Pathos”)

June 27th, 2011 by Greg Boutin
Emotional Intelligence (EQ) skills by four qua...

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In my previous post, I explained the importance of a logical business case anchored in compelling facts. I’ll expand in a future post on how to build a solid case. First, let’s highlight that in practice, compelling business cases will frequently fail to convince investors. And occasionally, entrepreneurs with evidently subpar business cases will manage to close a financing round. Why is that?

In a nutshell: because investors are people too. Yes… even venture capitalists. Since some may disagree on whether they have a heart, let’s just call it a right brain – the part of our brain that contains the subjective, intuitive functions.

Investors use their right brain extensively when making go-or-no-go investment decisions. While those decisions might sometimes seem illogical as a result, there are several reasons investors rely on more than just a purely analytical approach:

  • Investors see too many business cases to remember. Cold facts don’t stimulate memories much. Stories do. Stories are linked to hopes and fears – and in a coherent frame. Good stories appeal to our inner emotions. Nothing activates information retention better than emotions.
  • Investors are going to spend more time in your company if they invest in your company… They prefer to do that with people they connect with. Like it or not, emotionally intelligent people are usually easier to spend time with.
  • Investments remain based in large part on trust. It’s hard to trust someone you haven’t connected with. A common mistake fundraising entrepreneurs make is to not realize that most investors invest in people first, and in ideas second.
  • Investors extrapolate: if you manage to build a connection with them through your presence and your story, they assume you will do that with prospects and strategic partners too. The reverse is true too.
  • Investors see many brilliant business cases and great entrepreneurs. The ones that make the cut have something more. They appeal specifically to the investors they target, on a personal basis.

How can you use that knowledge to your advantage as an entrepreneur?

According to a study by the U.S. Small Business Administration, a venture capitalist finances only six out of every 1,000 business plans received each year. Also, the chances are six in a million that an idea for a high-tech business eventually becomes a successful company that goes public. And bankruptcies occur for 60 percent of the high-tech startup companies that succeed in getting venture capital. Investors have many perfect business cases to choose from, and as a result they will often look more favorably upon one that is “closer to home” and aligned with their personal interests and passions. Use that knowledge:

  • Get to know investors before you actually raise money, and focus on the ones most likely to invest in your business. Think about it as a date: your chances are much higher if you know something about your date. Without stalking them, try to learn ahead of time about their interests, hobbies, values, characteristics, anything that helps you find commonalities on which to build. Getting them introduced by your network helps a lot, because the introducer can tell you a few words about his connection.
  • Do not just deliver a dry pitch. Build a story. Include testimonials, personas of potential prospects, anecdotes for how the idea came to you, and how your own experience ties into this. Don’t turn it into ramblings or touchy-feely chats, but do add some concrete elements in it that can offer a chance to connect with the investor beyond the transactional aspect of your meeting. You may get them to engage emotionally and remember you and your pitch among the dozen others they saw that day.
  • Try to meet investors in person as soon as possible, and to engage them into your business. That favors geographical proximity, but with tools like LinkedIn, blogging and twitter, it is increasingly possible to capture the attention of an investor and connect well before you need any money from them. Ask them relevant questions.
  • Help them know you and like you even before they’ve met you. Becoming a subject matter expert in your field. Help positive information about you trickle to them through your connections. Again, introductions help here.
  • Check any bad feeling at the door. You had a bad experience with VC in the past? Any entrepreneur who fundraised did. Move on. Try to see the real person behind the position and the function.
  • Do what you love, love what you do. You’ll only spend the hours if you are passionate about it. Your motivation will transpire in discussions with investors. If money and fame are your top drivers, they know you will likely not go the distance. They want someone who will enjoy the journey.

That also means that even if you have a business idea that an investor would normally not consider, they may sometimes invest regardless if you managed to connect with that investor on a personal level. It’s not the rule, but it happens.

Of course, connecting emotionally is easier if you are known to the investor, or your reputation precedes you. I will talk about social proof in the next post of this series on the Art of Persuasion of Fundraising Entrepreneurs.

Meanwhile, what do you think? Does emotional intelligence indeed matter? Less so or more so now, with the web? Do you have tips to share in this domain?

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