One of the most tragic occurrences in the start-up world in my opinion is when a founder fails to raise funding for totally preventable reasons. In other words, they're addressing an important problem for a big market, have a unique, valuable, and defensible value proposition, etc. but then totally drop the ball during an investor conversation.
It's no secret that investors place a significant weight on the founding team. Every investor panel discussion and VC fund's website will inevitably mention something related to why they only invest in the most skilled/experienced founders. It may seem repetitive or cliche' but the reason this is so common is because start-up investing is inherently high-risk and yet there is very little data to base the investment decision on. Investors therefore try to decipher how much confidence they should place in the founders' ability to make their vision a reality. Proving you and your team are worthy of this confidence is about demonstrating your ability not just to create traction but to intimately understand what is driving it and how to drive more of it.
Let me give you a real-world example. ABC company has a SaaS product for law firms. They're very capital efficient, they grew their subscription base 20% compared to last month, they're beating their pro forma goals without funding, have little to no customer churn, and are essentially dominating the space. The time comes to raise their first institutional capital so they can grow their sales/customer success teams and update the product a bit. Their pitch deck looks great and the prospective investor is all but salivating about the opportunity prior to the intro meeting. The pitch is given, and the Q&A portion starts with simple questions: What was your revenue like this past month? What is your current customer acquisition cost (CAC)? What has your month over month (MoM) revenue growth rate been like over the past quarter? By all means fairly fundamental questions for a SaaS company even in the early days. The entrepreneur responds: "Uhhhh that's a good question hold on let me check .... You know I'm not sure because I'd have to pull out all of the records from our Quickbooks account."
Cue awkward silence ...
Unfortunately this entrepreneur is either going to receive a straight "pass" or the investor will forever hold off on making a decision and leave the entrepreneurs in limbo. The investor wants to know they are betting on a team that has not only proven traction but knows exactly how they will leverage the investor's funding to accelerate even more growth. If the entrepreneur is not living and breathing by the key performance indicators of their business then why should anyone believe they truly understand what's led to their growth let alone how they will achieve more of it?
The end result is that your company may represent a very lucrative opportunity but the investor will be left feeling the team is unable to cease it. In their eyes, it's not worth the risk of having the founding team burn cash on activities that aren't proven to drive growth while a more skilled competitor comes along and overtakes them.
Before you roll your eyes and think "Oh my god why are investors so determined to get me to jump through more hoops!?" it's important to recognize that in this instance the investor's best interest are aligned with the entrepreneur's best interest. There is a direct correlation between entrepreneurs who make data driven projections and those that ultimately achieve a successful exit.
While we're on the subject of data, the answers to an investor's questions should never include phrases like "well we hired a PR agent that has been creating a lot of great content marketing for us." or "we really believe our cold calling efforts are paying off." Why? Because both of those statements are either theoretical or subjective. There's little objective data demonstrating what you actually did let alone how those actions correlate to your results. Even if you have good traction, for all I know it was just good luck and word of mouth that got you there, in which case how is more funding going to help you accelerate that process?
Personally whenever I enter an investor discussion or deliver a pitch, I find the best way to prepare is not by memorizing various facts or scripts. It's a far better use of your time to simply make sure you know your business inside and out on a day-to-day basis. When the time comes to present, this data should already be top of mind. Try to look at your business like a machine and figure out what formulas and metrics seem to govern its success. If you can understand how your business operates from that perspective, so will investors and that's the only way they're going to write you a check.