In case you haven’t heard, one of the most famous entrepreneurs and investment insiders of the past 20 years has updated his classic business book.
The Art of the Start 2.0 by Guy Kawasaki came out on March 3, and I had a chance to catch up with him. He shared a few more tips for those trying to raise funds for a new startup and might be off to a rocky start.
“A long time ago I majored in psychology at Stanford, and this degree has served me well as an entrepreneur and venture capitalist. One of the main tasks of an entrepreneur is raising money, and here are five ways you can apply psychology to make this process faster and shorter.”
1. Familiarity breeds consent.
“In order to prepare for meetings with potential investors, you should study their LinkedIn profile and social media accounts. Your goal is to find a connection or shared interest. For example, that you attended the same school, play the same sports, or traveled to the same place. Use anything truthful you can to build a bridge and familiarity.”
2. Show traction.
“‘Traction’ in this context means that your company is making progress. Your ‘tires’ are on the pavement, and you are making forward progress. Evidence of traction ranges from actual sales to free registration to website traffic. Investors want to see any kind of external validation of the usefulness/coolness of your product or service. The more traction you can show, the less you’ll require investors to take a leap of faith.”
3. Catalyze fantasy.
“Many entrepreneurs try to ‘prove’ the size of their market by citing consulting studies. A better way to attract investors is to enable them to do their own calculation and end up with a fantasy. For example, there are 300 million Americans, and one in four owns a dog. That’s 75 million dogs that need two cans of dog food per day. That’s a market of 150 million cans of dog food per day–the kind of fantasy that got Pets.com funded.”
4. Bag one cat.
“This is the last pet analogy. Investors want social proof that your company is a good investment. The best form of social proof is that other people have already invested, so you need to get investors to get investors. The hardest investor to get is the first one. Rather than trying to bag a herd of cats, focus on a few in order to bag one. Conceptually, it’s better to have one cat in the bag than 10 cats 10 percent of the way into the bag.”
5. Create the illusion of scarcity.
“In order to bag your first cat–and every subsequent cat, it’s useful to create the illusion of scarcity. Scarcity in this case is that you’re going to raise a finite amount of capital so investors must move fast. This will only work in the kind of ‘bubbly’ market we’re in now. I’m not advocating that you lie. I am advocating that you consider hardcore bootstrapping and other ways to finance your company such as crowdfunding until you bag the first cat.”
6. Capital is precious.
“My last recommendation is a reality check more than psychology. No matter how much you raise, always spend your capital like it’s the last round of financing you’ll ever raise–because it could be the last round you ever raise. The assumption that you can always raise more money is insanity–you don’t need a psychologist to understand that.”