Why Passion Matters To Investors
As an entrepreneur, investor, and educator I have been working with and mentoring entrepreneurs for over 15 years. As an investor, I have screened over 1,000 entrepreneur pitches. What do I look for in an entrepreneur I want to mentor or invest in? I look for passion, trustworthiness, and a product or service with a unique competitive advantage. This article focuses on the importance investors place on passion.
Entrepreneurial passion is contagious. It helps people propel through challenges and inspires others. Passion can make the difference between success and failure for many entrepreneurs and startup companies. Without it, people are likely to give up sooner. This is why investors often seek entrepreneurs with passion.
In a recent two phase research study1 we looked at the importance of passion in the investing process. The first phase surveyed 150 angel investors across the country asking them if the entrepreneur’s passion is important in their investing decision. We also asked them how they define and perceive this passion. The results were a resounding, “yes it is important”. Their comments on how they define and perceive it fell into three main categories. First was “displayed affective passion”. This includes the outward enthusiasm and excitement the entrepreneur displays when pitching to investors. It is the energy and excitement that we connect with the concept of passion.
The second category was “displayed cognitive passion” such as the preparedness the entrepreneur exhibited. This was described as how knowledgeable the entrepreneur was about their industry, business plan, and product or service. This is when the entrepreneur has immersed him or herself into the industry and the marketplace such that they know most of the attributes about the customers, competitors, and their competitive advantage. In addition, they have put much effort into their company and know their financial information, business model, sales and marketing inside and out. The third category was “commitment passion”, such as how much time and money they have invested in their venture.
This is where it appears that the entrepreneur is doing everything necessary to win. They are persistent and willing to take risk. For instance, they have used most of their savings, or opened up an equity line to fund their business. They are willing to do whatever it takes to be successful.
When we asked angels why passion mattered, they said things like “it reflects the entrepreneur’s level of commitment to and energy for the endeavor being considered.” “Without passion it won’t last long.” “Without passion, the normal speed bumps can be terminal.” “Passion keeps people going in the face of obstacles and early failures.” “It contributes to momentum and has an infectious quality that brings in talent and money.” “Passion is important as it can drive an idea to conclusion and allow companies to overcome the seemingly impossible.” Clearly, these investors see passion as an important ingredient to the investment decision process.
Is this all that matters? No, angels made it clear that you had to have a unique business idea. They said things like “No amount of passion can make a pig fly.” “Numbers speak for themselves and the idea should make sense on its own.” “Passion is just one part of the equation: skill, knowledge, intelligence, eloquence, etc. also matter, it is just one element of the recipe”. Can passion ever be a problem? Yes, one angel said “Too much passion is dangerous because it equates to tunnel vision.” This is where the balance between passion and being open to listening is essential. Passion should not overwhelm the need for every entrepreneur to be continually seeking advice, new data, and opportunities to improve their company. Therefore, persistence and passion balanced with openness is important for all entrepreneurs to maintain. However, it is clear that passion matters and investors pay attention to passion. But does it actually impact the investment decision?
The second phase of the above mentioned study looked at how angels evaluate entrepreneurial passion during a screening. A screening is where entrepreneurs pitch their business idea to investors for potential investment. The study included evaluations of over 100 companies that were screened at Tech Coast Angels. Tech Coast Angels is located in Southern California and is the largest angel group in the U.S., and has invested over $120 million since 1997. This study showed that there is a relationship between investment interest and passion. However, it is important that this passion is genuine. In other words, acting excited with a lack of genuine passion can be detected by investors. Thus, balance between passion and openness to feedback is crucial.
One example of this is when investors can delineate a clear difference in passion between a founding entrepreneur and a CEO hired to come in after the company has been founded. Often investors don’t perceive the hired CEO as having the same high level of passion that most founding CEOs have. Investors sometimes perceive the hired CEO as someone who is performing a job, rather than having the underlying passion and commitment to do whatever it takes to make the venture successful.
Although bringing in professional management can be seen as a positive, it is a tricky proposition from an investors’ perspective in the early stages. A founder should always be involved in pitching investors. A passionate genuine founder with the right team, who is not completely passionate, is often better than a hired CEO with no founder in sight. A good entrepreneur knows their strengths and weaknesses and builds a complete team around them. However, they never delegate the passion and intensity for winning looked for by investors.
Passion motivates the entrepreneurial team and investors. Deep rooted passion that is intrinsic and pervasive at an emotional, behavioral, and cognitive level is what matters. If you don’t feel this level of passion for your venture, you should keep looking for the opportunity that you feel deep in your gut is something you are best suited to create and will do whatever it takes to succeed. This level of passion will exude from within, help keep you committed and prepared, and inspire investors. Show your genuine passion to investors. Passion matters to investors!
By Richard Sudek Phd –
Director of the Leatherby Center for Entrepreneurship
and Business Ethics at Chapman University