A few years ago I was talking to an entrepreneur who was sure that he had an amazing startup idea. Well, yes he did. I like his idea too. I really believed in it and I was ready to invest in it. In fact, I prepared by putting some time and effort into it, I reserved around a fairly substantial sum of my savings to dedicate and invest in his project but the deal never happened. I pulled out completely and removed myself from the project.
The issue was the lack of FOMO.
If you are in the startup ecosystem and you are doing fundraising, you have surely heard of the term FOMO “Fear of Missing Out”. It is a buzzword as much as a swearword (to me), because it is so badly used and abused.
In particular, in the early stage startup where the idea is still not solid enough when there are no revenues and the project is hungry for cash, like a well without a bottom.
The truth is that in the early stage startup, FOMO rarely happens, and as the term is so badly understood amongst young entrepreneurs and hardly explained in how to attain that state of FOMO in investors then all it becomes is a buzzword.
Here is how it works. Most entrepreneurs are so sure of their idea and projects that they think it is a no-brainer. If I explain to them my idea and the revenue projection then it must be a no-brainer to the investors. AND so their thinking continues “I am unique, there is no competition, we will sell millions, everyone will buy or start using our services/products, and in no time we will conquer the market”. They end the pitch by saying and “If you don’t invest, you are missing out on the best deal of your life”.
OK. I have exaggerated the conversation, but let’s be honest, it is not that far from the truth. If you are an entrepreneur (like myself) this is how you feel about your startup. This is certainly how I felt about my startup at the time.
Here is why there is no FOMO amongst investors for investing in you:
- The first biggest problem is that you have approached the investor(s) thinking that they think like you.
- The second problem is that you have ignored one big fact and that is people (Business Angels, Venture Capital) will take greater risk to avoid losses than to achieve gains. This is known as The Loss Aversion theory.
Investors have got a totally different view, experience, and expertise than you. While you are pitching to investors, in their heads they are calculating the risk, the risks of loss, and possibilities of you failing, and the chances of you making the numbers you are throwing out.
In previous posts, I have explained that for the investor to see and determine whether your project is investment-worthy, they need to have the basic numbers in order to calculate and arrive at the big sums you are suggesting.
This is step number one for avoiding the pitfall of the investor writing off your idea as they cannot see how you arrive at the multimillion-dollar revenues that you are projecting in the years to come.
However, this does not create FOMO. I personally could not put my finger on what creates FOMO until recently when I read the book “Never Split The Difference” by Chris Voss.
In this book, Chris explains that to create FOMO you have to persuade them that they have something concrete to lose if the deal falls through. It is not enough to show that you can deliver what you say or what they want.
In order to create FOMO you need to understand human psychology and the fact that we are irrational and emotional creatures. Therefore in order to create FOMO, you need to start by anchoring the feeling that they really have something to lose.
Easier said than done.
This is where most entrepreneurs go wrong. As Chris explains in his books, most people would approach simply by explaining: “This is the deal and if you don’t take it, you lose”.
Well, the most common answer to that is “I’d rather lose, but keep or save what I have.”
However, if you approach the proposal from a different angle, then you might be surprised. In this book, Chris describes how he approaches the other party. He starts by suggesting that it is probably a bad deal and that they probably will think he is a big talker, he screws up everything, and that he doesn’t know how to run an operation. He continues with his negative description that what he is about to describe might be a bad deal and a complete loss”.
Only once he has successfully managed to anchor their emotions in a minefield of low expectations and played on their loss aversion, does he come out with his proposal as an opportunity.
So there you go. Here is the Theory behind creating FOMO. At least the emotional part. I have seen many early-stage VCs invest in ideas that I would not touch in a million years. Irrational investments, where the numbers, logistics, and the idea don’t match up, AND YET, The VC / Business Angels have backed and lost the full sum, despite all the logic and math available to prove them wrong.