What Investors Look For: Three rules for raising money

Building a company of my own has taught me one very simple, very basic, and yet very complicated rule about entrepreneurship: How much time you’ve spent on it doesn’t matter or how hard you’ve worked doesn’t matter. Additionally, how many people around you who think (or don’t think) you’re going to become successful, doesn’t matter. And even how many investors do (or don’t think) you’re going to become successful, doesn’t matter. What investors look for don’t include any of these things.

The only thing, and I mean this quite literally, the only thing that matters is the result you are able to drive.

See, here’s what most people don’t tell you about what investors look for—not in school, and sometimes not even in “business school.”

The characteristics of entrepreneurship aren’t exclusively about coming up with a great idea. Both those words, “great” and “idea” are horribly subjective. To be honest, they’re closer to the indiscernible world of art, where a beautifully realistic painting could be worth $25 and a stick figure could be worth $2.5M.

Entrepreneurship is far more about giving people something they need, or something they didn’t know they wanted. It’s about solving a very clear problem. Not a problem you think exists, or a problem you think is important, but a problem that someone says, “If you could solve this for me right now, I would pay you $X.”

Since that is the only thing that matters, investors and the world at large really don’t care about anything else—including the 10,000 you’ve spent working on it. In a metaphor, that’s the equivalent of spending 10,000 reading history books but failing your history test. You might have spent a considerable amount of time reading and studying and “working,” but you weren’t able to drive the result, and so you failed.

This is what so many people don’t understand about business.

And beyond what investors look for, this includes all the different components of a business as well.

I had an early employee at Digital Press say to me, “I’d like a raise, and I deserve to be paid $X because that’s what the market says my degree is worth.”

I about fell out of my chair. Not because the individual was asking for a raise, but because in that moment I realized the massive lie society is told about how things are valued.

As a founder, I don’t pay people because of where they went to school. As a founder, I don’t pay people based on how many hours they spent studying growing up, or how “hard” they worked at their first job. Sure, all those things might be nice little indicators of what someone might be like if you hire them, but why I choose to hire someone at all has nothing to do with historical performance and everything to do with their ability to solve the problem I need solved right now.

By this logic, the entire business world can basically be reduced down to this very simple progression of exchanged value:

Customer or client needs Problem X solved ->

The Entrepreneur receives $$ for solving Problem X ->

The Entrepreneur wants to solve more problems, for more people ->

Then the Entrepreneur hires Employee(s) to solve Problem X ->

Customer or client pays the Entrepreneur who pays Employee(s) to solve Problem X.

And round and round our economy goes.

Which leaves us with the big question here. How do you solve a Problem that requires funding you don’t currently have?

The above is a very simple explanation for how most basic service and low-cost product companies work and what investors look for when considering an investment.

Things get more complicated when the Problem you want to solve is something expensive, like say, a digital health platform that syncs with your iWatch to monitor your heart rate and spot a heart attack moments before it happens (is that possible? Is anyone doing that?).

That would be a big problem to solve!

Unfortunately, you’d need a ton of cash and a long-term viable business model in order to make that happen.

3 of the biggest things that investors look for

If your “idea” falls in that sort of category, then here’s what you need to know about investors and the process of raising money:

1. Investors don’t bet on “great ideas.” They bet on viable business models and proven traction.

Perfect example: the concept of Snapchat was laughable when it first launched. Investors wouldn’t even consider investing in a company like that—until 2,000, then 20,000, then 100,000 users started using the app. Traction is what got investors interested, not just the startup idea itself.

2. Investors don’t just bet on viable business models and proven traction, they primarily bet on the founder(s).

This is something I didn’t fully understand until I reached a financial place myself where I could even consider the thought of making a small angel investment in another entrepreneur. As soon as I started entertaining that thought (with a few friends who were running businesses of their own), I realized that what drove the majority of my thinking wasn’t just the concept itself, or even how the business was doing at that moment, but how much I believed in the founder(s).

This is a truth among investors. So if people aren’t willing to bet on your idea, you also might consider whether the issue is your business or you as the founder. If the latter is the case, understand why or why not and capitalize on that.

3. Investors don’t want to pay for you to “figure it out.”

This is another huge, huge fallacy in the business world, and it’s one novice entrepreneurs follow blindly. The idea that an investor will just hand over $25k, $50k, $100k+ for you to quit your job and fund your first-time entrepreneurial learning process is naive. If that happens to you, congrats, you got lucky. Because the vast majority of investors want to invest in something that already has direction, is already moving, and already has other people jumping on board—which is why the whole “art” of fundraising is about timing, and ensuring that everyone is joining the vision at precisely the “most valuable” moment of your current lifecycle.

So if your idea requires raising capital to even begin in the first place, then I encourage you to find a way to validate the opportunity. Create a landing page and see how many people opt-in or sign up or pre-pay for your future product or service. Go get a handful of commitments from partners who agree to use your product once it’s built. To show investors what they’re looking for, do anything to show investors that your train is already moving, and people are jumping on board.

By Nicolas Cole, originally published on Minutes.Nicolas Cole is the founder of Digital Press, a content marketing agency that turns founders, executives, and entrepreneurs into world-renowned thought leaders. As an author, Cole is a 4x Top Writer on Quora and Top 30 Columnist for Inc Magazine with over 50 million views on his work. His writing has appeared in TIME, Forbes, Fortune, Business Insider, CNBC, The Chicago Tribune, and more.