The “This is Great” Gap

Great founders are great at recruitment and fundraising. Both are essentially the same skill; the ability to read and sway people to want to follow you as a leader. I think most founders think investors (who say no) are idiots and struggle on how to get them excited earlier. Here’s my framework to understand why founders and investors go “wow, this is great!” at different stages in the journey.

Let me introduce these five stages measuring how sure one is that an idea is great:

Belief, Conviction, Signal, Data, and Common Knowledge

In Belief, you think you know what the problem is, what you are going to build, and who to sell to. Most founders figure out that they didn’t know and they move from Belief to Conviction. Often prematurely they find themselves in the “know” and find the despair of later not being able to convince themselves.

But, after some time, having the conviction of the same thing over time and with more depth. It is now possible to raise some money on pure energy — you will have rosy cheeks, are able to hire impressive people, and emit a reality distortion field. You are in Conviction.

When you have high user sign-ups, there’s a Signal is that there is a need. Non-paying trials from enterprise customers show that you are touching a nerve and can talk the customer's language. Active users or sales show that the product has a market. When you have low churn or high retention you have a signal that the product is good.

When time passes and as you get volume in these, and they don’t show too high variance, they become data. Data becomes so much more valuable when you can show consistency and a framework around your hypothesis.

In time the maturity of the company gets to a point where you can show how the machine leads to money, and how much it costs to run. Your costs and revenue are predictable, your margins are good for your market. You grow more than the market. You can show how the end result is financially sound. It is Common Knowledge that you are running a good company.

The “This is great”-moment appears at different points

The problem is that most investors you meet don’t fall for your energy when you are in the conviction stage but ask for more information — cohort metrics, MRR, logos signed, etc. You find them boring and stupid. You see a clear signal!

Many VCs say “we’re looking for $100k ARR”, which only means “we’re waiting for enough signal that you’ve got something”. They see Conviction but need Signal.

Also, you can find investors who get what you do earlier than most, even if that is rare. I am a big believer in thesis-driven investing. Both because I think it is more fun, but also because I think there is a lot of arbitrage in knowing more about a field. It is hard to understand what good looks like, to see leading indicators, and understand where the biggest risks are in a field you haven’t spent a lot of mindpower on.

Just think about the following questions to understand how hard it is to understand a field:

• How many users should a mobile gaming company have to “have it”?
• What is an OK churn of an enterprise product?
• How should CAC/LTV/golden ratio be at a SaaS product with ACV of $500?
• Is mRNA or CRISPR best, or even applicable, in curing hemophilia?
• How hard is hardware? What is hard?
• What are sensible margins in retail?

You as a founder should either talk to investors who know your field (and most, of course, don’t), or you need to show what good looks like and find comparables.

A general rule of thumb: the later stage the investor, the more information and data they will be requiring from you. This culminates if and when you go public as a company when everything you can do can be measured and compared.

A big part of mentally surviving conversations with an investor as a founder is understanding that they are not stupid, but just have a different yardstick than yours for when their mind is blown. Make sure you ask them of their thesis and knowledge about the field (“Who do you compare us to” is a much better question than “How much do you know”, by the way.).

Think of this chart when you talk to investors:

Good luck and it might help to know that even within investors and different stages, we perceive the same problem. Remember, we are pitching you to later-stage funds.