Understanding the psychological traits of investors during a capital raise is crucial for founders to navigate the process successfully. This article delves into six key psychological factors that influence investors at different stages of the capital-raising journey.

LOSS AVERSION: Initially, investors are concerned about potential losses, such as loss of money, time, credibility, and opportunity cost. This natural human tendency is something founders should anticipate and address.

RELUCTANCE TO BE FIRST, BUT FEAR OF MISSING OUT: Many investors prefer to follow a ‘lead’ investor who has already conducted due diligence and invested in the round. Founders should be prepared to answer questions about other investors in the round and demonstrate the value of their venture.

BANDWAGON EFFECT: Gaining momentum and creating a bandwagon effect can be beneficial for founders, as investors are more likely to follow the lead of others. This effect is particularly noticeable during IPOs, where lead managers play a crucial role in raising interest.

FOMO – FEAR OF MISSING OUT: As a capital raise progresses, investors may experience FOMO, leading to faster decision-making and increased participation in the round. Founders should aim to generate FOMO by strategically combining deal structure, timing, process, lead investors, and momentum.

SEEKING 5X TO 10X RETURNS: Early-stage investors typically seek a 5X to 10X return on their investment. Founders must consider this when determining their pre-money valuation, as it significantly influences investor decision-making.

IMPENDING UPLIFT OR EXIT: Pre-IPO opportunities are often attractive to investors, as they typically offer a 20-30% uplift and represent an exit strategy. Founders should keep this in mind when planning their capital raise.

In summary, when planning a capital raise, founders should be mindful of these six psychological traits of investors and strategise accordingly. However, be prepared for unexpected challenges along the way, as famously stated by Mike Tyson, “Everyone has a plan until they get punched in the mouth.” Embrace adaptability and resilience to navigate the capital-raising process effectively.