A VC State of Mind: What Drives their Investing Decisions? - Ascent Conference

A VC State of Mind: What Drives their Investing Decisions?

This topic is one of the key themes to be discussed in our upcoming annual Ascent Conference. Register for the event here »

SaaS startup founders can often lose focus while struggling through funding-related problems, and while the fundraising circuit may feel tedious and draining, the reality remains: without capital, you won’t be able to build and grow a viable business.

A key consideration is that more often than not, there’s a disconnect between founders’ and VCs’ mindsets — something that founders need to understand if they want to outperform the competition in the crowded VC funding space.

But before we dig into the minds of VCs, it is important to first understand some of their primary motivations.

Big Risks, Big Rewards?

While some VCs bank on smaller startups in need of funding for growth, the slower rate at which they will gain back their doubled or tripled ROI is often a deal-breaker for many investors. Unless they see an exit pathway that will generate large returns, they’ll be reluctant to invest in your idea.

This largely has to do with the structure of VC funds. Typically the person or people leading the fund are not actually the primary investors, in terms of the capital itself. Rather, they are making investment decisions on behalf of a number of other (often institutional) investors. This means that when you make a pitch to a General Partner at a VC firm, you’re pitching to someone who makes their money as a percentage of the investment return. So, if you earned $120 million from a $100 million investment, the VF fund itself is not getting the full $20 million – they’re probably only getting around $3-5 million, while their Limited Partners receive most of the profit. This is why you’ll need to generate substantial returns in order to appeal to a VC investor.

Not to mention, VCs need big stakes. They usually hold on to 10-15% for a seed fund in a company to maximize their returns. Anything lower than that would mean a higher overall exit value is needed as there is a serious risk that the entire fund will not be returned.

FOMO as a Psychological Driver of VCs

Just as people often pursue the latest trends and fads, VCs have an innate fear of missing out on potential deals that may bring massive ROI to the table. Nothing scars a VC more than having passed on an opportunity that turns out to be the “next big thing.”

For this reason, VCs are always eager to ensure that their investments are well-positioned to capitalize on breakout ideas and technologies. Gigi Levy-Weiss of venture firm NFX shared his own experience about “the deal that got away:” “I said no and, other than losing a potentially amazing financial outcome, I also missed out on being part of a phenomenal journey,” he recalls.

However, this fear of missing out does not mean that investors are making random, arbitrary decisions — there are certain strategies they use to identify the most valuable deals from the large volume of opportunities that reach their desk. Here’s a peek into some of their tactics, as broken down by CB Insights:

  • Tracking investor activity. A known practice among VCs is to look at deals that their associates have passed on, and give those opportunities another look. Just because one investor failed to understand the value proposition of a company doesn’t necessarily mean that there isn’t a meaningful opportunity for successful investment. This is especially true when considering that different VC funds have different investment objectives, areas of expertises, and portfolio needs. As the saying goes, “one person’s trash is another person’s treasure.”
  • Monitoring the investment pipeline. Sometimes, VCs will pass on an idea not because of the validity of the business plan or the success of an idea, but simply because there’s a misalignment between a company’s growth phase and the investor’s needs. Some investors prefer brand-new startups, to maximize potential returns. Other investors are looking for more mature companies that have already achieved stable revenues, and simply wish to expand. Understanding how your startup’s current growth phase aligns with investor need is key to securing the funding you need.
  • Lineage tracing. This involves tracking missed Series B and Series C deals, identifying where they came from and who the investors involved in the deal-making were. VCs will then build relationships with these investors, and compare the deals they’ve traced with the ones they’ve already seen. 

Bonus: FOLS (Fear of Looking Stupid)

FOMO is not the only psychological driver of VCs — there’s also FOLS, or fear of looking stupid. 

Gigi Levy-Weiss cited some examples of some not-so-wise moves VCs make that could cost them billions in the long run:

  • Investing in a field where a top fund has already invested in a competitor (e.g. investing in Company XYZ’s competitor after Company XYZ has already raised massive amounts beyond initial targets)
  • Investing in a company that competes with a highly successful company (relevant particularly to a number of SaaS companies as competition can be fierce in this sector).

Combine FOMO and FOLS, and the result is a “high safety, low price” VC mindset. VCs often take their time researching your company in order to minimize risk. They are looking for low-risk companies with high growth potential — but framing your company as a FOMO-inducing opportunity is an important way to stand out from the crowd. 

Final Thoughts

VC psychology is important for founders to understand, so they can raise the capital they need. Once you’ve mastered the psychology behind VC investing, you can open up doors that may have previously remained closed.

Want to learn more about the VC mindset straight from thought leaders in the SaaS space? Register today for the 2021 Ascent Conference happening from October 6 to 8!


Photography by Daria Nepriakhina via Unsplash.

Privacy Notice

This privacy notice discloses the privacy practices for (www.ascentconf.com). This privacy notice applies solely to information collected by this website. It will notify you of the following:

  • What personally identifiable information is collected from you through the website, how it is used and with whom it may be shared.
  • What choices are available to you regarding the use of your data.
  • The security procedures in place to protect the misuse of your information.
  • How you can correct any inaccuracies in the information.

Information Collection, Use, and Sharing

We are the sole owners of the information collected on this site. We only have access to/collect information that you voluntarily give us via email or other direct contact from you. We will not sell or rent this information to anyone.

We will use your information to respond to you, regarding the reason you contacted us. We will not share your information with any third party outside of our organization, other than as necessary to fulfill your request, e.g. to ship an order.

Unless you ask us not to, we may contact you via email in the future to tell you about specials, new products or services, or changes to this privacy policy.

Your Access to and Control Over Information

You may opt out of any future contacts from us at any time. You can do the following at any time by contacting us via the email address or phone number given on our website:

  • See what data we have about you, if any.
  • Change/correct any data we have about you.
  • Have us delete any data we have about you.
  • Express any concern you have about our use of your data.


We take precautions to protect your information. When you submit sensitive information via the website, your information is protected both online and offline.

Wherever we collect sensitive information (such as credit card data), that information is encrypted and transmitted to us in a secure way. You can verify this by looking for a lock icon in the address bar and looking for “https” at the beginning of the address of the Web page.

While we use encryption to protect sensitive information transmitted online, we also protect your information offline. Only employees who need the information to perform a specific job (for example, billing or customer service) are granted access to personally identifiable information. The computers/servers in which we store personally identifiable information are kept in a secure environment.

If you feel that we are not abiding by this privacy policy, you should contact us immediately via telephone at 202-256-9707 or [email protected].