Good Investors are guided by Patterns, not Trends

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(This is Part One of a Three Part Series: “The Two Most Important Words in Venture Capital: Pattern Recognition”. Also, my apologies for the long hiatus. We’ve been doing some amazing things at Golden Gate Ventures, and I’m excited to announce some big news soon!)

Fundraising sucks. Fundraising in South-East Asia sucks harder.

It’s not that the capital isn’t here; it is. It’s not that the investors aren’t smart; they are. It’s not that the companies aren’t investable; they absolutely are.

It’s just that fundraising, in and of itself, is painful. It’s a time drain and ego killer, but nevertheless frighteningly important. Imagine: you need to raise a breathtakingly large amount of money from people you don’t know, otherwise your startup dies. And not die like, peacefully-in-bed-with-family-at-your-side sort of death, but a public-execution-with-your-family-in-the-audience sort of death.

And if that wasn’t bad enough, fundraising in South-East Asia is even more painful. Entrepreneurs here can’t simply borrow the lessons from more established markets like Silicon Valley or London; while some lessons hold true regardless of geography, many do not, like a critical mass of proximal investors to ease the logistical burden of traveling to multiple offices (i.e. Sand Hill Road in Silicon Valley) or a robust funding pipeline that linearly progresses from seed to Series A to growth and so on.

But you can get good at fundraising. Really good. But it can take time and a lot of (painful) lessons to get to that point.

When raising funds, entrepreneurs need to get in front of as many qualified investors as possible. Term sheets are made in-person, not through email. You need to move past that cold call, so you can sit down with an investor and actually talk about your business, express your passion, and show exactly why you deserve to be funded.

Hence, getting good leads is a critical component to any successful fundraise, just like developing a strong sales pipeline is critical to any SaaS company. It’s a percentage game: assume for the sake of simplicity that 10% of your cold calls lead to a deeper conversation. If you’re relying on one or two lead to raise your round, you’re setting yourself up for failure. Ten more? Now that’s something you can work with.

This brings me to my first, and most important, point:

Investors rely heavily on pattern recognition in their initial assessment of startups and entrepreneurs. I cannot emphasise this enough, and it’s so critically important that I’m only half-joking when I call it a trade secret of venture capital.

If you take anything from this post, make it that.

Funds, especially those with recognisable brands, can receive hundreds of pitches a month (thousands if you consider very large funds like Sequoia Capital and Andreessen Horowitz). There is no conceivable way investors can deeply, thoughtfully, and critically analyse every pitch they receive or hear.

Instead, investors need to rely on their knowledge, experience, and gut feeling to consciously and, in many cases, subconsciously assess the hundreds of deals they see on a monthly basis. Although this might sound lazy to the layman, the best investors are successful precisely because their pattern recognition is so accurate; they can separate signal from noise with almost preternatural skill.

This brings me to my second, and equally important, point:

If entrepreneurs initially convey enough positive signals, then investors’ pattern recognition will identify you as a potential investment and will be much more likely to initiate a call or meeting. On the other hand, if entrepreneurs initially convey enough negative signals, then investors’ pattern recognition will identify you as a pass and will not engage in deeper conversations, or worse, ignore you.

This is universal. Indeed, this probably applies to many other industries where there is a voluminous amount of information, and success depends on separating the noise from the signal. The key, then, is acutely understanding what constitutes a positive signal, and then fundraising exclusively with those signals in mind. In other words, those signals should literally shape how you speak to, engage with, and interact with investors through every stage of the fundraising process.

South-East Asian entrepreneurs, take note; this brings me to my third, and final, point:

Investors in South-East Asia have very different pattern recognition than investors in other markets. This is why entrepreneurs here do themselves a disservice when they blindly emulate best practices elsewhere. Again, while some lessons are certainly applicable here, many are not.

If you understand the patterns that investors look out for, you can understand what they’ll invest in.