In order for you to understand the difference between a professional investor and an amateur investor, it is imperative that you understand the psychology behind the two. The first step in understanding psychology for both investors is to comprehend their emotions. As human beings, we are designed to feel emotion; this enables us to quickly determine how we should react to various situations. Professional investors acknowledge the power of feelings and how they affect our decisions, and therefore make it a point to try to feel as little as possible in situations that can be a matter of life or death when investing. However, this is easier said than done. Amateur investors fail to acknowledge their emotions because they don’t recognize them as such, instead attributing their feelings to other causes or random impulses that have nothing at all to do with money or investment decisions. Ignoring one’s own emotions can cause them to feel lost if an investment does not turn out as planned, whereas professional investors realize that investments aren’t guaranteed; there’s always a chance of failure, but since they became aware of this possibility ahead of time, they were already mentally prepared for dealing with it in the event it happens.
Overconfidence Bias
Overconfidence bias is the tendency to overestimate one's own abilities, or to overestimate the likelihood of a positive outcome in investing. It can also lead to risky decisions or an unwarranted belief in one's own abilities. Overconfidence can be especially detrimental to investors when they are making portfolio rebalancing or asset allocation decisions, because it can lead them to take on more risk than they intend. The overconfidence bias often leads investors to think that they are better at stock picking than the market average, and thus less likely to underperform the market average.
There are three types of overconfidence:
Overprecision – Confidence in one's judgments is higher than the quality of those judgments warrants
Overplacement – Confidence in one's ability is greater than actual ability
Overestimation– Confidence that future events will unfold exactly as planned
Loss Aversion
Loss aversion is the tendency people have to prefer avoiding losses over acquiring equivalent gains: it's better to not lose $5 than to find $5.
Most studies suggest that losses are twice as powerful, psychologically, as gains.
For example, if you need to choose between a sure gain of $240 and a 25% chance to win $1000, most people will choose the sure gain. But when offered a choice between a sure loss of $750 and a 75% chance of losing nothing (and a 25% chance of losing $1000), most people will choose the gamble.
Another important aspect of loss aversion is the endowment effect. When we own something, it becomes part of us; we value our possessions more than outside observers do. This can lead us to make irrational decisions in pursuit of avoiding losses from selling our possessions.
Confirmation Bias
Confirmation bias describes a tendency to look for and interpret information in a way that confirms one's beliefs
Confirmation bias is a tendency to search for, favor, and use only information that confirms or supports one's preconceptions. This can lead to disastrous investment decisions.
Investors are bombarded with information from financial news, brokerage statements, the Internet, and other sources. We tend to be selective when processing this data, paying attention to certain patterns while ignoring others. In the context of investing and trading decisions, this can lead to confirmation bias by focusing on and remembering the evidence that supports a particular decision while failing to consider contradictory data.
A prime example of confirmation bias is anchoring. Anchoring occurs when we fixate on an initial piece of information (the anchor) and use it as the basis for making decisions regardless of contrary evidence.
For example, an investor may buy a stock based on an analyst's recommendation without looking at any other information about the company. The analyst provides the anchor for their decision — or in some cases their excuse for a poor decision — and they ignore any other clues that might suggest a different action.
Takeaway
Understanding these psychological biases can serve two purposes for investors. The first, and most obvious potential benefit is that they can help avoid making impulsive decisions in their investments that might lead to costly mistakes. Investors who are aware of the behavioral problems they are prone to will be able to work through their thought processes more deliberately, resulting in fewer emotional decisions. The second potential benefit of understanding psychology when investing is that it can also help you find opportunities based on your own accumulated knowledge or analysis without succumbing to the pitfalls of confirmation bias. Investors who understand their ability to be swayed by past success are able to keep an open mind to other possibilities. They can carry out further research or analysis on a particular investment opportunity, rather than immediately dismissing it because it doesn’t fit neatly with what they already know.
Shares of stock are the primary securities sold on exchanges such as the New York Stock Exchange or NASDAQ. When you invest in shares of a company, you become a partial owner of that company. This ownership gives you two rights that may interest you: dividends from profit and voting rights for corporate decisions. However, most investors focus on share value and you should, too. If a share isn't considered valuable, it's unlikely to pay out a dividend or have much voting value. You won't get any benefits from it, which is why knowing what class of shares to choose matters when you're purchasing stock.
What Is a Class of Shares?
A class of shares is a grouping of stock that gives holders special voting rights or distribution rights. A corporation can issue multiple classes of shares. Most companies issue just one, and publicly traded companies might issue common and preferred shares where the preferred shareholders are granted certain advantages over common shareholders and are usually paid dividends before common shareholders.
Investors usually think of stocks as being in one class, but there are some companies that have more than one. For example, The New York Times Company has two classes of shares: Class A and Class B. Since both classes have the same value, they trade at the same prices. However, Class B shares are entitled to 10 votes per share while Class A shares receive only one vote per share.
Types of Shares
A company has many options when it comes to the types of shares it issues. It can issue more than one class of stock in order to meet its goals, whether it's giving investors an opportunity to make a profit, making employees feel more invested in the company or raising money for different purposes.
Common Stock
Common equity is the most common type of share issued by a company. The stockholders who own common stock have voting rights on matters such as electing members of the board of directors, approving mergers and acquisitions and other major decisions affecting the direction of the corporation. Common stockholders also receive dividends if the company pays them out.
Preferred Stock
Preferred shares are another type of stock issued by a company that gives shareholders priority treatment over common stockholders when it comes to receiving dividends and if the company dissolves. However, preferred stock doesn't usually have any voting rights. Preferred stocks are often non-convertible stocks, which means that they cannot be converted into common stocks at any time. Common stocks can be converted into preferred stocks if specified in the contract between the corporation and investor.
The Different Share Classes
We have learned that a company's stock has multiple share classes, which are often used to give certain investors more rights. In turn, companies may issue one class of common stock with voting rights and a second class of common stock without voting rights. Also, some companies issue different classes of preferred stock that have various levels of priority over common stockholders in receiving dividends and assets upon liquidation. Some businesses have even issued multiple classes of common shares with different voting rights.
Companies generally offer multiple classes of stock to entice investors with the potential for greater returns while protecting themselves from losing control over their business. For instance, a company might want to raise capital by selling shares to outside investors but doesn't want to give up voting control of its board of directors. Issuing two classes of shares — one with voting rights and another without — allows it to do so while still keeping control of the company.
Some fund managers use different classes of shares to distinguish between their funds' investment goals, such as growth or income, or whether they employ active or passive management styles. For example, an actively managed fund might have a capital "C" after its ticker symbol, whereas a passively managed index fund might have an "S".
Why Are There So Many Different Types of Shares?
There are other differences between classes as well. Some classes provide greater dividend rights than others and some even get preference when dividends are paid out. Preferred shares are similar to bonds in that they pay a fixed dividend and are repaid before common shares if the company declares bankruptcy.
Other types of stock include warrants, which give shareholders the right to buy more stock at a certain price within a certain period, and employee stock options (ESOs), which allow employees to buy their company's stock at a discount. Each type of security has its own set of characteristics and risks that should be considered prior to investing.
In conclusion, share classes are a determining factor in whether you personally can invest in a company’s stock and how much of a percentage of the company your investments will take up. Due to its very nature, understanding share classes takes time and effort. It is also one of the components of an investment that you can control—that you have the power to learn about. And it could be worth your time to do so.
You may think that the best way to quickly get investor intros is to bombard everyone you know with your fundraising plans. While that might seem like an effective strategy, it can often backfire and actually hurt you in the long run. In this article, we’ll go over why it's important to strategically choose who you share your plans with and which instances are better than others. We’ll also discuss why it’s smarter to only ask industry specific connections for intros.
Ask Fellow Founders
It can be difficult to find the right investor for your business. But, by leveraging your network and asking fellow founders, you can get warm introductions to the best investors for you.
As a founder, you’re going to need funding at some point in your startup journey. If you’ve been working on your business for some time now, chances are that you’ve already begun looking for potential investors to back it up.
Though there are many ways of getting in touch with investors nowadays, such as through AngelList or Crunchbase, finding the right investors to speak with can still be a challenge. You don’t want to waste time speaking with non-relevant VCs or angel investors just because they happen to appear high on Google search results.
How do you get warm introductions to relevant investors, then? What is the best way of finding the right people to talk to?
You want to leverage your network by asking fellow founders.
Leverage LinkedIn
"Your network is your net worth." The adage is trite but true. If you don't have a strong network, it's going to be a lot harder to raise money for your startup. Investors respond more favorably to entrepreneurs who come highly recommended from trusted sources. That's not an invitation to have your friends and family send emails on your behalf. Rather, it's a call to action to build networks that will provide those introductions.
While building relationships with investors may seem like a daunting task, there are plenty of smart strategies that can help you find the right people to pitch and get in front of them through introductions.
LinkedIn is an essential tool for entrepreneurs and investors alike. It's an excellent way to identify target investors and determine common connections between yourself and them. Once you've identified the right person, check out their profile for information about where they went to school, what companies they've worked at or if any other people in your network have a connection with them.
In many cases, you'll find some sort of link between yourself or someone else in your network and the investor you'd like to meet. The key is finding that connection fast — so turn on LinkedIn notifications and start following VC firms and investing partners that you believe to be most beneficial to your future financial endeavors.
You have to do your research, and I don’t mean just reading the investor’s bio on their website. You need to know what they invest in and what they look for when making an investment. Keep in mind that investors will often say that they want everyone to apply, but there are areas where they are more likely to invest.
For example, if you are pitching an AI platform for farmers, it would make sense to look for VCs who have invested in other agtech companies. If you find a list of those companies and map it back to the investors, you can start building a list of people who might have the most interest.
If you’re pitching a startup focused on the enterprise market, you might be better off targeting VCs and angel investors who have experience with B2B startups.
If you’re not sure where to look for this information, Crunchbase is your friend. You can search for investors by keyword or company and then see who has invested in similar startups to yours before sending your pitch deck over.
Make the Ask
1. Build Relationships With Prospective Investors
The most important thing you can do when fundraising is to get as many prospective investors interested and invested in your company as possible. Once you have a few people that are excited about your company, you can leverage those relationships to warm up further introductions.
2. Get Introductions to the Prospective Investors
To get an introduction from someone that knows the investor, you need to figure out who those people are. If you already have a relationship with the person, it’s easy to ask for an introduction. If not, then you will have to do some research online (LinkedIn, Twitter, etc.). Once you find all of the people that know your prospective investor, it’s time to reach out.
3. Ask For An Introduction
Once you’ve found someone that has a relationship with your prospective investor and is willing to make an introduction, ask them how they would like to do it. Some people prefer email while others prefer LinkedIn or phone calls. Whatever the case may be, follow their lead and try to make it as easy as possible for them.
When making these connections, remember that your first contact does not always have to be an investor. It’s more important to begin networking with prospective contacts and build bridges in the business community. In that way, you’re building up a broader network of industry-relevant partnerships, particularly when it comes to your industry-related target market. That wider network will serve you well down the road, with referral fees and even better warm intros for your next funding round.
Venture capitalists are responsible for funding some of the largest companies in the world. Do you have a business idea that could turn into the next Apple or Google? If so, then venture capital is a great way to fund your startup. In this post we take a look at how venture capital works, who it's best suited to, and what you can do to find the money you need to build your business.
Be prepared before you try to get money
The first step in raising venture capital is to get ready.
Preparing to raise capital can take months or even years of hard work and discipline. If you think you can't spare the time, you probably haven't yet raised enough money to be successful anyway. The problem with raising too little money is that it's a waste of everyone's time. Raising $100,000 for a business that needs $1 million puts you in exactly the same situation as if you hadn't raised anything at all. Yes, there are some exceptions to this rule. But by far the most common mistake entrepreneurs make is not having enough cash in the bank.
People who don't have enough money often look for shortcuts, such as "bootstrapping." Bootstrap companies are generally those whose founders scrape together just enough money to get their companies started and then make the best of what they have. These companies usually have no choice but to bootstrap because they can't get any other kind of financing. Bootstrapping is not a good strategy when venture capitalists are available.
It's important not to confuse bootstrapping with being frugal and efficient, which are essential traits of every successful company, whether or not its founders raise money from venture capitalists (VCs).
Have your financial projections ready
Getting venture capital for a business is not easy. Venture capitalists run a business and are looking for businesses that can provide them with the highest return on their investment. There are many ways to find venture capital, but one of the best ways to get funding is by pitching your company to them.
The first thing a venture capitalist may do is look at your business plan and they're going to look at your financial projections and see if you have all of your numbers in line before they want to meet you. This means that you need an excellent business plan and excellent financial projections. If your projections don't make sense or aren't realistic, it's not likely that a venture capitalist will want to talk with you about investing in your company.
The next thing a venture capitalist may do is look at your executive summary. The executive summary should be written in such a way that it grabs attention immediately and makes it clear that this is an investment opportunity they can't afford to ignore.
The last thing a venture capitalist will do is meet with you. At this meeting, they are going to want to know more about you and why they should invest in your company. They will also be looking for signs that you are committed and passionate about your business idea, so be prepared to answer all questions with exuberance and intelligence.
Keep track of your investor pipeline
When a startup is ready to sell shares, the firm's management and board members typically round up a group of investors who are interested in investing. This "pipeline" of investors is a list of people you can contact when you're ready to raise capital.
Tailor your message to each potential investor. Explain how the firm plans to use its money and what sort of returns the investor can expect. In other words, make them understand why they should be interested in investing.
One tactic that has been used with success at several startups is to send potential investors periodic emails outlining company accomplishments along with financial results, product evaluations or industry trends that bode well for the company's performance. An email update once a month may remind interested parties they're still on the list of possibles and keep interest alive.
Then, when it's time to approach venture capitalists, you have a list of investors who are already familiar with your business model, statistics and goals.
Pick the right amount of capital for your business
In order to get the right amount of capital, you need to be able to justify how much you need and what you’ll do with it.
To figure out how much you’ll need, identify your burn rate. This is a simple calculation. It’s your monthly expenses divided by the number of months you can survive before running out of cash.
Say you have $100,000 in the bank and spend $20,000 per month on rent, salaries, advertising, etc. You can survive for five months ($100,000 divided by $20,000). If you plan to raise money after three months, then your burn rate is three months; if you plan to raise it after six months then your burn rate is six months.
Most businesses that are raising their first round of venture capital want their burn rate to be at least 12 months from the date they get their new financing. This might seem like a long time but there are many reasons why this is a good idea:
You can change things about your business that aren’t working without feeling rushed to put another deal together.
You will have more time to negotiate a better deal with investors (i.e., more favorable terms) because you won’t feel desperate or crunched for time.
While it seems like the quest for capital never ends, there is light at the end of the tunnel. If you’re a business owner considering trying to get venture capital for your company, hopefully this short guide will help you get on the right track to success. As you likely already know, a successful pitch can be life-changing for any business owner, and it can take a lot of hard work to put together. However, after reading this guide, you should have a general idea of what to expect from Venture Capital Funding and what steps to take in your journey towards raising it.
How do you effectively pitch a business idea? The ability to pitch a business idea is one of the most important skills a young entrepreneur can learn. This skill will lead to more clients, more customers, and more revenue. A good pitch should include three essential components: a value proposition, an articulate explanation of how your company solves problems for customers, and an evidence-based story that describes how you’ll succeed in solving the problem. It should be four or five minutes long and engaging. You should be able to tell it in person or on a phone call. If your goal is to secure funding from investors, it may need to be shorter than 4–5 minutes.
Know Who You’re Pitching
Pitching is an art form. It takes a lot of preparation and practice to deliver a pitch effectively. Most entrepreneurs fail to get the desired response from their pitch because they have not put in the time and effort to create a good one. If you are planning on pitching your business idea to investors or venture capitalists, it is very important that you understand whom you are pitching your idea to and what they expect from you.
Always remember that you do not need everyone’s attention or approval. You just need the right people — those who believe in your business idea and want to see it become a reality. These are the types of people who will be the best investors for your business and help you realize your dream.
Here are some things to consider when preparing your pitch:
Know Your Audience — Your audience should have some interest in investing in businesses like yours. For example, if you are running a tech startup, then it would be wise for you to pitch your idea at a gathering where venture capitalists and angel investors interested in tech startups will be present.
Know What They Want — The sort of information an investor wants to know about a business idea differs from that which an ordinary person would want to know. For example, an ordinary person might want to know the financial history of the startup. Make sure you can communicate all responses effectively and efficiently.
Consider How You’re Presenting Yourself, Not Simply Your Idea
When pitching a business idea, there is more to it than the idea itself. In fact, most people who do not have the success they desire in business do not have the right mindset. Here are some steps to selling your idea effectively:
- Pause Before You Pitch. Before you even begin pitching your idea to a banker or venture capitalist, pause and consider what audience you are pitching to. What do they know about your industry? Where do they stand on the issue? How will they perceive your presentation? If you do not understand how the audience will feel about what you are presenting, you cannot effectively present it.
- Know The Facts. Do research on the topic of your presentation and know all of the facts before beginning. If you don't know all of the details or statistics about your particular industry, who will?
- Gather Your Thoughts. Put together a list of talking points (at least five if possible) that accompany each point you wish to make about your presentation. Practice these points repeatedly in front of a mirror so that when you go into the "real world" with this pitch, it comes across like second nature.
Investors Want to Know How They’ll Cash Out in the End
It is critical that you keep in mind the end-game for investors. They want to know how you will cash out, or get their money back with interest. Even if your business isn’t ready for an IPO or acquisition, having a plan for when it is will make you a more appealing investment.
The first thing an investor wants to know is what are your exit options. The most obvious is selling the company. For example, Facebook has been rumored as a candidate to be acquired and there have been reports of Twitter being bought by Google. But there may be other options that aren’t as obvious, such as a merger or the sale of just part of the business. The idea is that investors like to have flexibility in their investments so they aren’t limited to one exit strategy.
Next, they want to know what the value of the company could be if it were acquired or went public today. You can use sales multiples from companies similar to yours (based on size and growth) to determine your sales price. Keep in mind that investors want growth stocks so you need to show how quickly you can grow revenue and sales and why your company will continue to grow for years after its initial launch. They’re the ones putting up all of their cash so they need to know that they’ll be able to convert it into additional cash that they can return to their partners.
Bringing Your Pitch in for Landing
If you are able to effectively pitch your startup idea to investors, you have the potential to receive enough funding for it to become a reality. You will be able to afford spending months or even years working full or part-time in developing your startup solution, and if your solution is viable and successful, you will end up with a huge financial return. And who knows? Perhaps one day your startup will be worth multiple millions of dollars.
As you begin to think about the state of your business in 2022, you will be challenged by a variety of new and disruptive technologies. Here are 3 tech trends that will shape the future of business.
Technology has always been a critical factor in business. From the invention of the market to the creation of the first website, technology has played a keystone role in how we operate. But in 2022, business will be revolutionized by disruptive technologies. These new technologies will change the way we work, think, and interact with the world around us. In this article, we’ll cover 3 specific trends that will fundamentally alter 2021s business landscape and challenge you to think about future opportunities differently.
The Commonality Between Crypto and Metaverses
This thread aims to define the common language that would exist for crypto and metaverse in the context of developing first crypto currencies (and crypto-assets) and their virtual reality counterparts, which may be called metaverse. By introducing this common language, people from both crypto and metaverse will be able to help educate the new public about these technologies and collaborate on their early development. We have slowly grown accustomed to knowing that crypto and metaverse technology is at its peak. Now, technologists are working to tear down the distinctions between existing blockchain tech and leading-edge augmented reality development. There’s still lots of niche interest in several AR-related technologies, but now we’re seeing interesting possibilities for applying AR more generally--and a common language of crypto-based systems that can power the future of interactive media generation.
A Rush of Decacorns
Currently there are 41 companies around the world that claim the title of ‘decacorn’ ($10B+), while new unicorns pop up every week or so. We anticipate this number will triple in the next five years, with the majority focused on data, AI or the digital world. Several factors are contributing to the generation of decacorns, and even more decaquintillions. 1) Riding on the back of Metacorn and Unicorn, the public has become familiar with unicorn deals and their value. So not only do the investors want the returns from Unicorns in a short time frame, they now expect it from Decacorns too. 2) Venture Capitalists (VC's) are looking for new opportunities for capital deployment. With less companies that qualify for investment, as it filters up to these higher valuations, VC's have to seek smaller investments with much lesser scale. 3) Decacorn acquisitions will be a big part of getting quick returns on their investments. And no company is safe, even if they are the leader in their space or have growing revenue streams...Just ask Uber and Snapchat.
The Evolution of Customer Data Infrastructure Platforms
Ten years ago, customer relationship management (CRM) systems including SugarCRM, Salesforce, and Oracle were the technology platforms used by marketing and sales management teams to track customers and prospects. This year we will see the rise of customer data infrastructure platforms that provide deeper integrations with point solutions that are becoming more mainstream. Customer data infrastructure platforms (CDI platforms) are enabling enterprises to make a shift from on-premises data centers to the cloud. They aggregate transactional data from various sources in real-time and analyze it for multiple applications. CDI platforms are regarded as the next-generation data warehousing platform. As enterprises carry out digital transformation initiatives to upsell, cross sell, and deliver personalized experiences to their customers through automated processes and AI algorithms, they require more data to feed these initiatives. This is where CDI platforms will have an edge over traditional on-premises data warehouses (DWs) because of their elasticity and agility to handle huge amounts of data.
We find technology’s evolution the most fascinating aspect of the business world of today. Just like climate, science, and international politics, tech is an enabler of innovations and is constantly refining its processes in never-ending cycles of improvement. At Go VC, we view technological advancements as a force that will ultimately motivate this kind of thought process across all industries. As we enter an era when technology will dictate our lives and businesses more than ever, we’re excited to see what happens next.
Go VC is an early seed venture capital firm that invests in a diverse range of young startups in the tech space and beyond. The core mission of Go VC is to build successful investment partnership that include capital and expert strategy to ensure all investments achieve optimal results.