Commitments
Separating the pros from amateurs and what founders should be aware of
As an entrepreneur, there is a point in your career when you will have to raise capital, whether it is debt or equity or both. It’s the music you have to face whether you like it or not. Some founders like the process of raising. Some hate it. Doesn't matter. Either way, you’ll need a team that knows how to deal with investors.
Debt is obvious. It is relatively easier to raise (assuming you are cash generating of course). It comes with strict terms, built-in protections, and costs less than equity. But I’m not going to talk about that side of the capital stack for now.
Equity is another animal.
Equity has no built-in obligations. No fixed payments. No timeline. That’s why it costs more. Because of the flexibility and a lack of obligations (and liquidity), investors require higher upside with non-normal returns. When they buy equity, they’re making a bet: that by owning a piece of your company, at a certain price, they’ll hit a minimum return over time. It’s called ownership. Some require cash returns (exits or dividends) and some will require returns in the form of wealth (not necessarily exits but growth in equity value over time).
As you start engaging with investors, you will soon realize that each one is peculiar and each will determine value differently. But over time, patterns emerge. You start to see what separates the pros from the amateurs.
That’s what this essay is about. The difference between professional and amateur investors. I’m writing this in the hope that future founders find it useful as they navigate fundraising. By no means is this a complete list and I recognize that I may irritate certain investors by writing this.
Professional Investor Mindset:
They think long term.
When they invest, they understand that it takes time to build wealth and money, and you can recognize this based on their professional track records. If an investor is a regular in the slots at Vegas, has a poor track record, and is volatile in nature, it will likely reflect in the way he treats your company. Seeking “the quick buck” as they say. If he is generally self-made and built his wealth through prudent actions with patience and discipline, then those are good signs. This is one of the most defining personality traits for investors. Startups go through growing pains, sometimes evolve, and sometimes choose to stay the course for the long run, so long as value (wealth) is increasing for shareholders over time. This last sentence is important.
Sometimes I hear entrepreneurs ask "If good investors are patient, why did ours want their money back so soon?" Usually, money is demanded because the business is not building wealth for investors. It is stagnant and hasn’t grown. At this point, professional investors want money back and it is a fair ask if the founders are not delivering to their promise. They won’t ask for it if the company is expanding and generating wealth for everyone, unless the investor is a fund with strict timing obligations.
Related to the above point, they never ask about “exit strategies”.
They understand that exits are not the goal, but the outcome. The goal is to build the best business you can. Monetization follows naturally if you do that well. So watch out for investors who lead with questions about exits. As Adam Smith might say, it’s not from the founder’s benevolence that the business succeeds, but from their self-interest. Founders want to monetize too, and the best investors get that. They align with the founder’s mindset and respect the journey. Founders don’t join investor journeys. Investors join founder journeys.
They have a strong understanding of markets.
They dive into your product’s pricing, analyze the market you serve, and study its underlying dynamics. Most importantly, their thinking is rooted in first principles.
Let me give you an example from the Philippines.
As of 2023, the country’s GDP stands at $437.1 billion.
This means that if a founder tells an investor that their Philippine startup will be as big as Amazon, you can be pretty sure it is a quick pass. Why? Because Amazon’s market cap is $1.8 trillion (as of today), 4x the size of the Philippines. This means that even if there was one company that monopolized the entire Philippines, Amazon would still be 4x the size of that company. Now, of course there are other factors in the GDP equation but these are just rough estimates. It doesn’t take a genius to understand this.
This relates to another thing: the product or service sold must address the most important market within its geography. The Philippines is a poor country, with a GDP per capita of just $3,800. Yes, fancy cafes, gluten-free breads, boutique gyms, yoga studios etc. all look impressive. They win our hearts. They can be profitable and sustainable businesses, but they won’t achieve scale or lead to billion-dollar fortunes in the Philippines.
Investing in poor countries requires a deep understanding of the mass market and what people are actually willing to pay. Professional investors know this. They can look past the noise (the appeal of trendy products built for upper-class bubbles) and focus on real demand (simple products serving the general population). They could care less about how the product looks.
They understand unit economics.
Most professional investors will expect you to walk them through revenues, gross margins, operating margins, net margins, lifetime value, and others. So as an entrepreneur who aims to secure funding from the best investors, you need to understand your unit economics cold. Good investors will literally ask you to break down your product and business by the numbers. There is no such thing as “pass it to the numbers guy.” Founders and CEOs need to speak the language of finance.
They prioritize cash flows over income statement.
The best case study of this is Jeff Bezos and Amazon. Amazon was unprofitable for 10 years after it’s founding, and even throughout the 2000s, they had razor thin margins. However, they were cash flow positive. Bezos recycled that cash flow back into the business, front-loading operating costs to drive expansion in infrastructure, technology, customer acquisition, and eventually AWS. No dividends (even to this day). Bezos understood that over time (the long term) the markets would reward him. The average investor in the early years judged Amazon negatively, but the sharp ones knew what he was trying to do. They glossed over the income statement, and focused on cash flow and compounding. This brings me to the next point: sacrificing operating costs to justify future value is ok and must be encouraged to maximize wealth. I encourage you to track Stripe. The Collison brothers are following a similar playbook. They are still private, but watch their future performance closely.
Their annual report is a goldmine of lessons: https://stripe.com/annual-updates/2024
They understand the dynamic between top-line and bottom-line performance.
From a financial perspective, think of it this way:
Revenue Growth → How much customers love your product.
Gross Margins → How efficiently your product delivers on that love.
Operating Margins → How well you manage the team and operations to keep serving that love.
Net Margins → What’s left after paying for the capital it takes to support that love.
Pros like focusing on the first three.
They first want to understand how your product fits into the market you're serving—and this is reflected in your revenue growth and gross margins. What they like to see are:
Strong revenue growth
High gross margins
High transaction velocity
Or ideally all of the above.
If that test is passed, they’ll then evaluate how well the business is managed, which is reflected in your operating margins: how much you're spending and where, in order to serve the market efficiently.
In the early years, you're building your company and often spend more to scale operations in anticipation of future revenue. That’s why smart investors focus first on gross margins. A flaw in the product economics may signal a weak product—and product strength is the foundation of any business, so this is a non-negotiable for any business. Operating costs, on the other hand, are like fuel for a fast-driving car: you can adjust the pedal as needed.
Let’s go back to Amazon. They didn’t generate any profits and had weak net margins for nearly half of their existence. But notice how strong their top-line economics were, with gross profit growing at a compounded annual growth rate (CAGR) of 50.24% since the company was founded.
Source: Amazon’s financial filings
Another thing you'll notice is that their gross profit margins have improved over the years, which means they’ve continued to strengthen their product(s) over time.
Another good sign.
Source: Macrotrends
One thing worth noting is that in the early stages of a business, as products are still gaining market acceptance, product performance may be sacrificed while companies refine their offerings—testing and tinkering until they get it right.
But the one thing smart investors don’t want to see is declining sales and gross profits.
You might think “wow they lost a lot in 2022.” What happened here is that Amazon lost money from (1) their investment in Rivian with its stock plummeting after its IPO (yes even Bezos makes mistakes on investments) and (2) over expansion due to covid. But that didn’t stop them. These were one off events that don’t interrupt product performance, and hence the bounce-back a year later.
They understand losses are part of the game.
I wrote about this in one of my previous articles Why Angel Investing is Not for Everyone. There are no hard feelings if things go sour. Professional investors understand that they took a risk in your company. There are many cases of investors backing founders that have failed multiple times. Why? Because they took the risk in the business model with the founder and understood them before they invested. If that same founder finds a new opportunity that makes sense, and if they’ve proven to be ethical and hard-working, those same investors will back them again. Pros separate emotion from objectivity when looking at opportunities, which leads us to the next point.
They never ask who else is investing.
This is important because it means that they’re evaluating your business objectively, without being swayed by who else is on the cap table. They’re not driven by FOMO, and they don’t follow just because others are investing. In fact, they’re often willing to invest even if no one else is. They rely on their own conviction and judgment.
And finally, they honor commitments.
When a professional investor says they will commit X amount over the phone, they will commit X amount. Regardless of written contract. They move quickly once they have enough information. No maybes, no “umms,” no “buts,” no excuses. You can count on them to deliver.
This list isn’t exhaustive, and I may have missed other important qualities.
If you have any you'd like to share, feel free to email me at ksugarte@docapitalventures.com.
ABOUT THE AUTHOR
Keenan Ugarte is Managing Partner at DayOne Capital Ventures, an independent private holding company that invests in and builds high-growth, early-stage businesses that serve the underserved Philippine mass market. He is also the Co-Founder of The Independent Investor, a media platform spotlighting early-stage companies and innovation within the Philippine startup ecosystem.
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