Understanding the Investor Mindset
When pitching to investors, it’s essential to understand what drives their decisions. Investors don’t just want to hear about where your company is today. They want to know about the future. Understanding the investor mindset is incredibly important for any entrepreneur or business owner seeking funding.
What an investor wants to buy is future growth. Investors in startups have a simple goal: to put their money into something that will yield massive returns in the future. They are not as interested in companies that are already mature and big.
Why? Because the larger a company becomes, the more difficult it is to maintain high growth rates. Instead, they are looking for businesses that are still relatively small but have the potential to scale rapidly into something much larger.
Investors are essentially looking for businesses they can help transform from small, early-stage ventures into massive, high-growth companies. The sweet spot for most investors lies in finding that balance where the company is still growing rapidly but has already started to prove itself in the market. When I invest, I’m looking for a giant money machine that hasn’t gotten big yet.
What Is a "Money Machine"?
At the heart of every successful company lies a money machine. This is a term investors use to describe a business that has a reliable and repeatable system for generating profits. It’s not about one-off sales or temporary revenue spikes. A money machine is a business model that, once set in motion, can consistently turn investments into profits.
A money machine is something where, if I feed a dollar into it, I get three dollars back. At least two of those dollars, I put back in, and I get more. It’s a beautiful cycle.
Investors want to see this kind of perpetual growth engine in action because it represents minimal risk with the potential for significant returns. For them, it’s not enough to invest in a company that is simply profitable today. They want to know that your business model is built to sustain and grow over the long term.
The Role of Risk vs. Return
In the world of investing, there’s a basic principle: the higher the potential return, the higher the risk. But what investors are really looking for is the highest return at the lowest possible risk. They are constantly balancing these two factors when deciding where to put their money.
Early startup investors tend to stay away from later stages, where the risk is lower because the returns are also usually lower. On the flip side, they don’t want to invest in a company that’s too early-stage because the risk of failure is much higher. The sweet spot lies somewhere in between—a company that has shown initial success but still has room to grow significantly. Investors want to buy into companies that are essentially "money machines" on the cusp of explosive growth. (Look for next week’s post on how to build a money machine.)
Clear, Concise Communication with Investors
One often overlooked but crucial aspect of attracting investors is the importance of clear and concise communication. Investors are busy, and they have many options to choose from. The companies that stand out are the ones that make it easy for investors to understand what they are getting into and how the company plans to achieve its goals.
The best companies have regular newsletters. Good newsletters are metric-driven, and they get really good at sharing both positive and negative news. Investors want to feel informed about the companies they invest in, and regular, transparent communication builds trust. You want your investors to feel confident that they made the right decision by putting their money into your business because, eventually, you’ll need them again—for more money, introductions, or support in selling the company. Check out The Founders Guide to Effective Update Letters.
In today’s investment climate, the companies that succeed are the ones that can consistently prove their value and scalability. To win over investors, founders must focus on showing that their business has the potential for significant future growth while maintaining clear and transparent communication. Stay ahead of the game!
