Welcome back
In the second session, as I already mentioned,
we are going to talk about
the scholarly research related to the investors
So, we are going to understand investors
from some researches
It can be very helpful for us to understand investors
Let's begin with this study
This study is really great
This study tried to answer the question about
How investors determine about start-up
and how they distinguish
good start-up and bad start-up
The researchers observed
five angel clubs over two years
It takes a long time
They attended 17 monthly meetings,
conducted 82 interviews,
and they observed 18 investment decisions
They found out that the first one, investors
Investors' need for extraordinary investment returns
They don't want
1% profit or 10% profit
They said that
We want to find out diamond in mud like this
Suppose that you are the keys
who are looking for the diamond in mud
Surprisingly, you can find out diamond from mud
This is what the investors need
Again, they don't want a 10% profit
They don't want 20% profit
They need 200 times profit
10,000 times profit, something like that
This looks like a diamond in mud
Second, the investors
acknowledge that they can lose their money
And they said that
You miss 100% of the shots you don't take
So, although you know you will lose the money,
investors put their money into the startup
Why?
Because they don't want to miss out
This is the kind of fear of missing out
It's about home run hitters
It isn't really hard to hit the home run
But if you miss the plate,
then you miss the shot 100%
That's why
they join this investment a little bit
Third
Their decisions
Their decisions rely on their feeling
rather than the data
Although they studied the data of the startup,
when they make a decision for the investment,
they rely on their own feeling
rather than the data about the startup
The investor said that
You can tell in the first 5 seconds of a meeting
The investors understand
whether this startup is good or not within five seconds
Something like this
Investors can figure out
which business is good,
which founders is good within five seconds
Because they rely on their feeling
Let me summarize the result found by the research
From the research, we can understand that
Investors are someone
who search for the diamond in mud
Swing for home runs
even knowing the high risk of the failure
And lastly, rely on their intuition rather than data
What do you think?
Isn't it insightful?
Before I read this research,
I didn't understand the investors too much
But after then, right now,
I'm able to understand
what investors are looking for,
how they think and how they behave
Let's move on to another research
related to the investment and investors
Look at her
She is my colleague
and we studied in the same university
When I entered the university as a Ph.D. program,
she graduated from the program
and then we met in a scholarly conference
Over there, she introduced her research about investment
She said that
she conducted research about the question,
How do investors determine
She observed and interviewed
angel investors from Tech Coast Angels
More specifically,
she analyzed 57 angel investors' investments
Then, she found out that
There is a process
like a job recruiting process
From the Application to the Funding
For example
So many startups applied
their business idea to the angel club
and six of them get rejected
Only 40% of them proceed to the next stage,
which is a Pre-Screen stage
So many startups
are also rejected at the Pre-Screen stage
and only 25 or less startups
proceed to the Screening stage
Screening stage is kind of a job interview stage
Startups are invited
to the job interview by the investors
Investors ask several questions
and the startup answer those questions
If startups' answers are great,
then they proceed to the Due Diligence stage
Due diligence stage is very critical
Because the investors
actually visit your workplace
and actually discuss about your business idea
with your consumers and your suppliers
They try to understand
what you have,
what your business model is,
and what your technology is
They try to investigate everything about yourself
Due Diligence refers to
a deep study conducted by the investors
If your Due Diligence was successful,
then you are finally invited to the dinner meeting
In the dinner meeting,
you have just 50% of the chance
One out of two rejected
Only one was successfully selected as Funding
So overall, fewer than 4% of the startup
can be funded out of 100 startups that applied this process
So competitive, isn't it?
This is the investment process
And she identified those process
Also, second topic of her research
is about investment criteria
Then she asked about the investment criteria to the investors
Her answer was
Investment criteria vary by stage
More specifically, before due diligence,
what happened?
Founding team and founder
Founder or founding team is the most important factors
So, the investors just focused more
on founders or founding team
before the due diligence stage
But what happened after due diligence stage?
After due diligence stage,
your business model, your business itself
and your business details
can become the more critical factors
I will show you the picture
I will give you the picture described by her
If you apply your business idea to the investment process
then probably, you go through
application, pre-screen and screening stage
According to her, before the due diligence
your investors just focus on entrepreneurs or entrepreneurial team
as a key criteria of the decision making for the funding
What happened after due diligence?
After due diligence,
investors just focused more on the business
rather than entrepreneurs or entrepreneurial team
Isn't it insightful?
So if you're at stage in the screening,
then you care for yourself
and you care for your founding team
But if your stage is after the due diligence,
then you emphasize on your business model
and business itself
Let's move on to various topic about
influencing factors on investment selections
I'm going to talk about founder or team
And I'm going to talk about Preparedness
and then Game Changing Vision,
then Passion and Positivity
Let's look at this research
This research was conducted by
the Stanford University professor at that time
The researchers just got the question
Which startups do investors prefer?
Which startups?
So they conducted
a randomized field experiment through the AngelList
Have you heard the name of the AngelList?
AngelList is a website platform
to connect angel investors and startups
And of course, there are many angel investors
who are looking for great startup
So the AngelList send out the email
that include great information about the startup
So, the angel investors who registered for the AngelList
can receive the email about the startup's information
And there's a rule
AngelList has just three information in email
The first information is about
Founding team's information
Second information is about
The current investment history information
And the third information is about
Current transaction information
Such as revenue or profit
Important thing is,
if a certain startup has three good information,
then AngelList provides
three good information contained email
to the angel investors
But if the startup has one or two good information
and another information is not good,
then, AngelList provides email contained
only good information included
Do you understand that?
For example
You and your team graduated from Ivy League University
and had a job experience on
Google or Facebook
Then, we say
You have a good information about the founding team
But you don't have any funding history
and you don't make any money
So, you don't have any transaction record,
you don't have any previous funding history
So, in this case,
AngelList send out the email about your startup profile
that contain only the founding team information
Do you understand this mechanism?
For this research,
the researchers sent out
16,981 emails with 21 startup profiles
and they organized
many different types of the startup information
To how many investors?
4,500 investors
So, the investors received
so many different types of the startup profile
with the different types of information
Some startup has a great founding team
Other startup has a great result about their revenue right now
Something like that
So, the researchers analyzed
Which information do the investors respond to?
What kind of information is important for them?
What about the result?
The result showed that
the most important information for the investors is
Founding team
It's very interesting
So, the angel investors respond to the startup
that has great founding team information
Another important thing is
The more experienced the investors,
the more they emphasize the team
In other words,
the less experienced investors,
the more they look at more information
But experienced entrepreneurs just focus on the founding team
Because they knew the other information
is not important in this stage
The most important information in this stage is about
the team or people and the founders
So, the founding team is very important
So, founder itself
Not previous funding and current revenue
Don't worry about your previous funding
and don't worry about your current revenue
As long as you have great founders and great founding team,
you will be okay
Let's move on to another research about the investors
This research analyzed 14 episodes of the Shark Tank
You watched the Shark Tank episode before, right?
Shark Tank is a business reality show
launched by ABC in 2009
where the entrepreneurs pitch their ideas
to receive the investment funding from the investors
And they are Shark, as investors
Also, this research analyzed
87 episodes of Dragon's Den
Have you heard about the Dragon's Den?
Dragon's Den is a very similar business reality show
aired by BBC in 2006
with a very similar format to the Shark Tank
So, anyway, the researchers found out that
pitches with the deep and the factual support
can increase the funding success by 20%
In other words,
if we prepare very well about your pitch
Such as, if you have a great knowledge about your market
and if you have numbers and industry insight,
then, investors feel that you are prepared
Then your funding success
will be increased by how much?
20%, which is a great number
So, the key to success of your funding
is about your preparedness
So, when you pitch your business idea to your investors,
you should be prepared very well
Why?
Because your preparedness increases your funding success by 20%
Remember the number
This is very insightful
Let's move on to another interesting topic
Which is, the game-changing vision
You might exaggerate on your vision
in front of the investors
When you pitch your business idea,
you might say that
I want to be a game-changer in this market
I want to change the entire old market
That could be kind of visionary
But that could be dangerous
for the investors' point of view
This professor analyzed 918 Israeli startups
in terms of their game-changing vision
Whether the startups have game-changing vision or not,
and how big it is, something like that
So, the results show us that
if you have game-changing vision,
and if you display
your game-changing vision to your investors,
then your likelihood of the funding
will be increased how much?
22%
It's really great
If you emphasize on your game-changing vision too much,
then what happens?
Your funding success will be increased by 22%
It's really great finding
But more interesting thing is
investors are very smart,
and they want to avoid a dangerous situation
So, although they are more likely
to invest their money into the startup with game-changing vision,
investors reduce the total amount of the investment
How much? By 24%
So, to summarize this research,
if you display your game-changing vision
to your investors,
your funding success chance
will be increased 22%,
But your total amount of the investment from your investors
decreased 24%
which is very interesting
So, dream big, more chance
although you will receive less money
So, you can choose
You can choose either one
If I were you,
I will show my game-changing vision,
and I want to increase the funding success rate by 22%
Let's move on
Passion
Passion is kind of an innate emotion
Innate emotion
It looks like a fire in my mind
I'm really passionate about this service or this product
The professors conducted fMRI study
Have you heard about fMRI?
fMRI is a medical machine,
The medical doctors put the patient
into the MRI machine,
and they take a picture of your brain
So, from the MRI,
we can see the inner brain activities
So, we will use these MRI devices
to conduct the research about
your thinking and your brain activities
So, basically,
the researchers manipulated some kind of a video for the experiment
Then they recruited 15 investors
And then, they put these 15 investors
into the MRI machine
Inside the MRI machine,
the investors look at the video
Already manipulated video
Inside the video, there is an entrepreneur
and the startup founders
They pitch their idea to the investors
inside the video, inside the MRI devices
And then, the investors
just watch this video inside the MRI
Then the researchers analyze
the brain activities of the investors
inside the MRI devices
What about the result?
The result was shocking
If the founders in the video
displayed great passion about their business idea,
then investors' brain activities significantly changed
How?
Investors' neural engagement increased by 40%
What do you mean by that?
If the startup founders showed their passion a lot,
then the investors' brain
activated by 40%
The investors became interested in this business by 40%,
which is great
If founders display high passion,
then investors' interest to this business is by 26%,
which is great
So, I will show you the picture
Inside the MRI devices,
if the investors feel that this founder displayed high passion,
then their brain changed like this
And then, their intention,
their interest to this startup
increased by around 24%
I'm sorry, 26%,
which is really interesting research
This is the last but not least research
about the investors
The professors analyzed 1,726 Kickstarter campaigns
The results showed that
If the investors find out any positive language
from this Kickstarter campaign,
Then the startup's funding success rate
will be increased by 3%
Also startups can increase
their amount of funding by 3%
Success rate increased by 3%
Amount of investment increased by 3.4%
which is a really interesting result
What do you think?