The Psychology of Raising Money

What’s the primary reason people invest in your deals?

I just got done closing on a deal where I raised over $1,000,000 from private investors for my first multi-family deal. Before that process started, I thought the primary reason people would invest in my deal would be because of the returns.

But I was dead wrong.

Yes, returns are necessary and part of the equation.

But returns can be provided by any number of other people.

It’s because they trust you.

They trust you as a person. They trust you as a businesswoman or businessman. And, as a result, they trust you with their money. They know you or they know people who know you and vouch for you.

So, how do we gain trust from potential investors? Glad you asked. There are three ways:

1. Time with them.

It takes time to establish a relationship with investors. For your first syndicated deal, you most likely won’t have investors who haven’t known you for a at least a couple years. You just don’t have the track record. Once you establish a track record, then it will be easier to get strangers to invest with you because of your proven track record.

So, the more expertise you have (see below) the shorter amount of time you have to know them. I’ve known all my investors (none are family members, btw) for a period of 2 – 10 years. But, the more experienced I get and more deals I do, the lower that window of time becomes.

2. Expertise.

The more expertise you demonstrate the easier you can raise the money. BUT, WAIT. There’s a big point.

You MUST demonstrate the expertise in a way your potential investor understands. Who cares what you know. It’s about what’s relevant to your investors and how you communicate it to them.

A doctor needs the info communicated differently than an engineer than a small biz owner than a person who has invested in real estate before. The key to your success is recognizing how to communicate the information to each audience based on their background and needs.

By the way, it’s possible to display expertise even if you haven’t done that specific thing you’re raising money for. I did.

I had never purchased an apartment community prior to raising money to buy a 168-unit complex. But, I did have relevant experience in real estate. I have a portfolio of single family homes and teach classes on how to invest in real estate. That experience, combined with me aligning with more seasoned team members (mentors + property mgmt. company), allowed me to qualify in the expertise category.

3. Personal connection.

The thought that people only invest with their analytical mind is bogus. We invest with emotion. We go in with preconceived notions about something then we tend to look for things that validate that notion.

Try this. Look around your room and for the next 30 seconds find everything that’s red. Look red. Find red. Look red. Find red.

Now, write down all the things you saw in the room that are blue.

While looking for red you probably found stuff that was redish brown or orangeish red but counted it red. And we don’t find stuff we’re not looking for.

Point is we find what we seek. And investors do the same thing. If they have a preconceived notion about you and the investment they’ll look for ways to validate that. So, the key is to establish a solid personal connection with them.

This can be done by knowing what they care about and seeing if you can align with that in a genuine way. Don’t know what they care about? Ask them this magic question:

“What’s been the highlight of your week (or weekend)?” That will uncover some things that are top-of-mind for them. They might say “making a business transaction” and that will tell you that it’s important to focus on the #s and profitability more so than other conversations. Or, they might say, “finally being able to get away with my family” and that will tell you that time is precious and perhaps you should play up the “passive investment angle” with them.

Other than returns, what are some other things you’ve noticed are important to investors when raising money?