Is your mental filter “could” or “should”?

During the last year as the chairman of an angel group, I have been asked (paraphrased from various iterations):

• • “Before applying, can I just pitch you first to see if you will be interested?”
  • “I don’t see the point of providing you with this information (so can I skip this task)?”
  • “I’m a great startup raising money, so will you schedule time on my calendar?”
  • “No one else has asked this question except you (so do I really need to answer it)?”
  • “My investment group invested in this company – so is your group going to?”
  • “I’ve already been down this road – if you keep asking for more information, you’re going to decide not to invest (right)?”

Throughout the seed-stage startup ecosystem, the term that keeps popping into my head from such questions is “entitled”, the core meaning being inherently deserving. When a founder or syndicator approaches other investors with an expectation of their wallets, it is already an unforced error. It is never perceived as positive and is always a turnoff. So, why does it happen so often?

There is the error, and then there is the underlying belief. I think the error happens because chronically entitled people don’t objectively sense they are entitled. Inherently means it is obvious on its face. ‘Anyone would naturally see what I see in my pitch, so if you don’t see it, there’s something wrong with you.’ However, for those who are more polished and avoid committing the error from the start, they still often hold an underlying belief that their deal is inherently deserving of our dollars. Start digging into corners they prefer remain dark, and the belief eventually expresses itself.

I give some grace to first-time founders in their first startup. But elsewhere, I have opined that there should never be a startup CEO who has not already been a CxO in a prior startup. Reducing the incidence of entitlement is further down on a long list of reasons for this. I have less mercy for those who have lost investor capital before and haven’t cultivated humility yet. Syndicating investors who expect their peer investors to jump on their bandwagon sans diligence are really inexcusable.

So how do we hit the reset button on appropriate expectations in the ecosystem?

A good self-test for all of us is properly ordering our ‘shoulds’ with our ‘coulds’. For founders:

‘I could raise the capital that I need because I should do the requisite work up-front to demonstrate how I can rationally return capital to investors.’ This works much better than ‘investors should provide the capital I need because I could pull out a win if everyone realizes how great my ideas or accomplishments are and do as I ask.’

For syndicators: ‘I could safeguard my own investment and help my portfolio company succeed because I should demonstrate that I did the investigative work to corroborate the company’s ability to deliver intended results.’ This works much better than ‘more investors should pile in with me on the deal because it could be a win if the company doesn’t run out of money.’

Now, in the same way that sentiment surveys are unreliable and should not be the only evidence supporting a business strategy, pithy ideals like what I’m calling for here don’t get us anywhere without acting on them and deciding to do things differently. So, what do we need to do differently?

This is really something for startup CEOs to solve. A good attorney does not ask a question at trial that they don’t already know how the witness will answer. A good CEO does not allow anyone to speak for the company without already knowing what that surrogate will say. The CEO is the chief of all company messages. In addition, asking for money should feel like being on trial and it never helps to be a hostile witness. Answering every examining question calmly, rationally, and with evidence in hand sways the jury.

An effective CEO does not expect to find enough capital from those who will invest in an idea (and that one’s enthusiastic confidence) alone. If such investors part easily with money, then that’s dumb luck. But the CEO should assume no such investors exist and treat them all like professionals who will do the risk analysis. CEOs should expect to be asked to prove their claims and be happy and eager to prove them all. By “prove”, I mean subjecting plans and hoped-for outcomes to various tests of rationality built upon prior human/economic experience. A lot of data collection and analysis is required to perform those tests for every risk.

A CEO poised to succeed recognizes the critical value of a lead investor in every round who has performed comprehensive diligence and is willing to share it without having ever been seen by the startup. Company-led rounds, rounds crediting a small investor as the lead, rounds with diligence the company purchased and helped to review, and rounds led by investors who didn’t perform complete diligence (combined, the vast majority of the deals we are seeing today) seriously undermine credibility. Add the unforced error on top, and a CEO confirms that entitled expectation is their fuel, because it is not rational confidence.

But if we investors expect CEOs to be a star witness during the diligence trial, then we need to stop with the entitled expectations among ourselves. Who is going to lead and do the diligence work? If nobody wants to, then there is no deal to be shared among us. If one investor (group) wants to write an aspirational check on little diligence, fine. But don’t expect anyone else to, and accept the added risk that the company won’t fill out the rest of its round – such investors are better off filling whole rounds themselves.

As an ecosystem, every deal should be led by an objective investor. If one investor or group doesn’t have the SMEs available to do an all-points diligence review, then make a syndication of investors/groups who agree to cooperate on performing a combined diligence effort that can cover all the bases and share credit as co-leads. Never share the diligence report with the company – investor eyes only. CEOs getting frustrated (at the risk of coming off as “entitled”) because they keep being called back onto the stand to be asked the same questions over and over have good cause to complain about witness-badgering. If a startup has been asked an examining question and delivered a complete and factual response once, that should be showing up in the lead investor’s trial transcript (that is, DD report) for others to review and not ask it again.

So, CEOs, if you are paying attention and understand what I’m advocating for here, you very much want a lead investor with a reputation for producing excellent diligence that is easily syndicated. These are perennially available to well-prepared, investable startups (because such startups number so few in actuality). If you cannot find a credible lead, you probably are not offering a sufficiently compelling investor proposition. The answer is not to go raise from anyone you can find anyway, as you will all likely just lose together and spread the pain around. The answer is to get some objective assistance in finding out what’s wrong with your startup and fixing it if you can.