The Secret On How To Qualify Investors

If you’ve been following my blog with discipline, you’ve already read about how to create a sales funnel and how powerful a sales funnel can be. Today I’m going to give you insights that will make your sales funnel all that more effective. By using this technique, you will spend more time on deals that will close and less times on deals that go nowhere. I call this technique qualifying your sales lead.

To best explain how to leverage it, let’s use an example. Say you are fundraising 100k for your blockchain startup. Let’s also say you know that the average amount an angel would invest in a startup of your stage is 20k. Doing some quick math demonstrates you need 5 investors at this ticket size to hit your goal of 100k. (FYI, the word ‘ticket’ here is used as a metaphor. When an angel or VC is partaking in a group investment, the amount each one puts in is referred to as a ticket).

As stated in previous posts, we know that not every investor we approach is going to say yes. So to get 5, we need to start off with a much larger number, maybe as many as 50, depending on the strength of our startup and the risk appetite and wealth of investors in our ecosystem.

50 is a large number of investors and trying to close all of them will take an enormous amount of time. If each investor takes an average of 5 one-hour meetings (a light estimate), plus a minimum of 10 hours per investor of preparation, such as responding to emails or reviewing term sheets, that’s 15 hours per investor multiplied by 50 for a total of 750 hours! Knowing some of these investors will balk, the question then is: how can you reach your goals while reducing the amount of time you need to spend per investor?

This is where qualifying your leads comes in. Paul Graham, the founder of Y-Combinator, gives some excellent advice on this in his post How To Raise Money, an excerpt of which you can read here:

When you talk to investors your m.o. should be breadth-first search, weighted by expected value. You should always talk to investors in parallel rather than serially. You can’t afford the time it takes to talk to investors serially, plus if you only talk to one investor at a time, they don’t have the pressure of other investors to make them act. But you shouldn’t pay the same attention to every investor, because some are more promising prospects than others. The optimal solution is to talk to all potential investors in parallel, but give higher priority to the more promising ones.

Expected value = how likely an investor is to say yes, multiplied by how good it would be if they did. So for example, an eminent investor who would invest a lot, but will be hard to convince, might have the same expected value as an obscure angel who won’t invest much, but will be easy to convince. Whereas an obscure angel who will only invest a small amount, and yet needs to meet multiple times before making up his mind, has very low expected value. Meet such investors last, if at all.

As a coder, Graham loves to use metaphors from the world of software development. I won’t explain the definition of a breadth-width search, but basically it’s another way of saying ‘you don’t need to check every single desk drawer to find your keys. There are smarter ways of looking’. In this case, as Graham states, the smarter way is to use information you already have to calculate which investors you should prioritise. He calls the output of this calculation Expected Value.

Returning to our example of your hunt for a 100k investment, recall that you are looking for 5 tickets of 20k to make 100k. These numbers are not exact. You may get 4 tickets of 25k, or 6 tickets of 15k and end up 10k short. But you need to start with a guideline, so you aim for 5 investors of 20k each. Recall also that to close these 5k, you need to start with a much larger number, around 50. Here are 3 theoretical profiles of these investors that we will use to demonstrate how to qualify a lead:

  1. Amy – is extremely wealthy and loves startup culture and so is easy to get investment from. Tickets of 50k are her speciality. Unfortunately she knows nothing about blockchain and has few useful contacts that would be relevant for you.
  2. Betty – is a hard sell and is a veteran of the FinTech world whose personal connections could catapult your business to success. Her normal ticket size is 20k.
  3. Cathy – is like Betty. She is a hard sell, and usually invests around 20k. She also has connections in the financial world, but is the first to admit blockchain is somewhat outside her comfort zone.

Using this information, you can then qualify each. You do this by taking their average ticket size, and multiplying that by their probability of closing and their value to you in helping your startup succeed, as seen below.


This table is quite simple, but there is actually lots to be said about it. Let’s start with the column entitled ‘probability of closing’. You’ll notice that Amy almost always invests, but I still gave here a probability of closing at only 50%. That’s because no deal is certain, especially if you haven’t even approached the investor yet. Likewise with both Betty and Cathy I’ve assigned 20% probability of closing as both have a reputation of being a hard sell.

Now let’s examine ‘investor value’. If you have a blockchain startup and are worried about issues such as regulation or how to make your product accepted by the mainstream banks, then someone like Betty is your top pick, followed by Cathy who also may be helpful. Last is Amy, who has little value in terms of connections and insights. You therefore assign Betty 100% value, Cathy 80% value and Amy 10%. You could give Amy zero, but some money is better than no money, so you give her a token representation to keep her in the game.

After having assigned probability of closing and investor value, and then multiplying the original values by those percentages, we can then see our current ‘expected value’ for each deal. Interestingly enough, Amy, who we started with a 50k ticket, is now valued only at 2.5k, Betty has gone from 20k to 4k and Cathy from 20k to 3.2k.

But the numbers are not what’s most important. It’s the order of the value of the deals. Here Cathy takes priority over Amy as she is more valuable as an investor. Betty takes priority over them both for the same reason. You now can use this as a guideline for deciding which investors to spend the most time courting.

Another thing to keep in mind is that these numbers are fluid. As you move deals down your funnel, you can increase or decrease their probability of closing. An investor who has verbally said yes and has a good reputation will have a much greater chance of closing than an investor with whom you’ve only had one meeting with.

Doing these calculations can also help you reverse engineer how many cold leads you need to close. If you add the Expected Values of Amy, Betty and Cathy you get 2,500 + 4,000 + 3,200 for a total of 9,700. Therefore if you can get 10 of each type of investor, you would have a total of 97,000, essentially your goal of 100k.

As you know, fundraising is a stressful and arduous process. By qualifying your leads in this manner, you are also likely to close your first investor faster. This in turn will inspire others to sign on, quicker. This can make the difference between your startup living or dying.

If you found value in this post, I also recommend reading the rest of Graham’s post How To Raise Money.