At the early stage of a startup, investment decision making happens with partial information because not enough data points exist. Investors give a disproportionate weightage to the entrepreneur as a person. The driver in the parlance of racing!
I have heard investors invest based on their liking a person even though the idea morphs into something entirely different with time.
The founder(s) is a crucial predictor of startup success. Investors often spend time with the founder to feel how they live, their decision-making, ethics, integrity, resourcefulness, how they focus on issues and respond to challenges, demonstration of their perseverance, and risk-taking ability. This requires spending time with an entrepreneur to create a ‘picture’ of the person. To do this, investors often connect with the founder’s peers, friends, and erstwhile employers and colleagues, people, and organizations working with the startup (e.g. channel partners, customers, suppliers, traction, and go-to-market, etc.) all potential sources of information.
So, where does this fuzzy analysis fit in?
Many of the things that investors look at relate to ‘time’ as a crucial unstated metric. In accounting and monthly reporting, ‘time’ is an implicit variable. Reports only show what happens at a particular moment in time. Investors do not micro-manage. They want to understand that the entrepreneur’s understanding and commitment to the speed of implementation to achieve growth with capital is the same as what they want.
· Commitment, passion/determination, and integrity
· Adaptability versus perfectionists — Learn to take imperfect products to test with customers. It shows that the founder is ready to (change direction (pivot) if needed). This impacts the way work gets organized within a company. In the early days, responsiveness and turnaround speed during building products and developing go to market is critical.
· Coachability — Is the team open to new ideas and inputs?
· Humility and self-awareness — They know what they must learn to make it work
· Completeness of the team — how founders complement/create capability needed for what is needed to build the startup. Gaps in team capability and how they will be filled.
· Do they know how to select people, look for skills and personality traits needed?
· How quickly can founders learn to lead by selecting people and delegating — essential for growth
· Quantum and nature of founder compensation. Fair compensation is acceptable. A sudden increase in compensation raises red flags.
· A founder’s willingness to exit
· Specific experience relevant to building the startup — product, marketing/selling, finance, and scaling
· Founders have no choice to know/learn business and finance. They cannot say they do not know.
· Do they know how to deploy capital for growth/scale?
1. Why are you building this company?
The entrepreneur should be able to present an elevator pitch describing their why (mission) and their value proposition.
2. Where do you think you can take this business?
The entrepreneur should be able to present a Total Addressable Market, identify the focus of the immediate opportunity (target customer segment), their positioning for the customers, and why this selection was made (is it a stepping stone to a larger opportunity).
3. Why do you think customers will want to buy this more than anything else?
The gap it fulfills, solves an important painful problem, and most importantly will become an extremely high growth (viral) opportunity.
4. Why is the timing right for the startup?
Influences of the economy (tailwind), technology (enablement), or consumer acceptance because of trends.
5. Why does your team have the right to do it?
Why should you and your team win? What is exceptional about you?
6. Why are others not doing it?
Your knowledge and awareness of the product, technology, and consumer behavior? Explain the unfair advantage you have. Do you have an entry barrier?
7. Does your business/platform get stronger as more people engage/buy/stick?
Are any network effects possible in the business? How close is the business to rapid growth?
8. Why would you do better than a bigger technology company?
Your execution strategy (monthly with metrics), distribution and sales channels and strategy, and delivery and customer.
9. Why should we invest in the business?
What do you need beyond capital from the investor?
10. Value proposition and unmet need.
Clarity with which the entrepreneur defines the value Proposition and unmet need. And a description of the product/service based on the market. Is it already developed, or can they validate it once developed? Have they clearly defined their customer? Why is their product/service necessary? Is it doing something different/or doing differently? Is it “need to have”/ “nice to have?” Is it IP based and patenting status?
11. How is the offering positioned and market segmented?
What is space where they will operate? Is it large and growing rapidly? What is the competition for their product? Strategy to deal with competition. All businesses have competition.
12. How is execution planned?
How will they deliver results? Their experience with pilots and prototypes, etc. What are their sales/marketing plan? Scaling up plan. Risks/mitigation plan. How will they make money? Who pays them? How do they sell? What channels do they use? At what gross margins?
13. Financial plan
Has the founder spent time in planning the month by month cash flows? Current / Projected for the next three years. When will it break even? Personal investment funding is received to date. Investment sought and valuation expectations. Status of business and accomplishments to date (last ~6 months). Timeline (significant milestones over the next ~18 months). How will the money be used? What metrics can they show? Employee growth. Customer growth. Geography growth.
No lofty statements. Goals with measures. Decode everything about the business into numbers.