Useful and relevant insights for founders and investors
Over the past 5 years, I’ve had the opportunity to evaluate more than 500 startups around the world as part of one of the best global angel investor networks, Keiretsu Forum (as identified by the Pitchbook rankings), and also as a part of one of the largest corporate houses in India and globally. While I had a great time working with high-energy and ambitious founders, I learnt a lot from the fellow angel investors and their experiences as well. My hope is that the lessons from evaluating startups can be helpful to founders working to onboard investors across all stages (pre-seed, seed, series A, B and beyond), as well as current and future investors (angels and early-stage VCs). The following blog highlights lessons I find most memorable.
1. You have to kiss many frogs before finding your prince.
“You have to kiss a lot of frogs before you find your prince,” said a highly seasoned, serial R&D tech entrepreneur in his 70s, who was at the center many mega exits (hundreds of millions) throughout his life.
“I work hard at things for 10-15 years with a lot of failure on a daily basis. But then something works out after all that effort.”
He mentioned candidly, “Be careful about the kind of people you work with. Even if the starts are great, a lot of things change over time.”
The same is true while fundraising as well.
I have seen so many high-quality startups and entrepreneurs knock on doors of hundreds of angels and early-stage VCs in order to raise growth capital. Even if you are a great startup, rejection is something that happens all the time. In fact, Google founders were rejected so many times in the initial days that they seriously considered returning to research work by selling the company.
2. Some prefer not to put their money and time in the same place, and it works for them.
An angel investor asked the following question to a founder (who is also a serial entrepreneur and active investor): “You have had so many mega exits in the past with significant value creation. Why would you want to raise a relatively small amount of money from angels for your current early-stage venture?”
The founder candidly replied, “We are not only looking for capital. We are also looking for smart people (investors) with great networks who can not only challenge us but also give us access to their high-quality networks. For example, one of my other angel investors can help me get time with some of the largest potential clients in the political and corporate world, which would be impossible for my customer success team”.
3. It is very important to keep your pitch deck, investment documents and online presence consistent.
I have come across many startups with significant information and data inconsistencies across multiple platforms. Interested people (investors/potential employees/partners) do check and verify facts, data, and people.
For example – one startup founder we recently looked at has listed herself on LinkedIn as CFO, but with other titles on company documents. Even the target consumer segment was different in different documents.
Another startup – a gentleman listed as a potential CTO was missing from the revised pitch document, and valuations differed from document to document.
One more founder explained how she made significant gains in stock market investments while claiming that nobody lost money in the stock market.
Nothing beats the following though.
A founder posed (in a photo opportunity) for one company in a media release for a certain technology, and simultaneously approached investors (for the same technology) through another company.
We live in a flat world where people check for data and can talk to each other. It should be easily possible to avoid above-mentioned scenarios. Most startups fail because of suicide (their own mistakes) rather than murder (by the competition), says one of the best investors of our times.
4. Persistence, courage and boldness is infectious.
Only 7 percent of startups survive after year 5 from inception (according to FJ Labs founder). That means 93 percent usually fail. That is why VCs create portfolios of hundreds of startups so that the 7 percent that survive (and thrive), can cover up losses from the failed ones and also provide significant returns.
That is just the nature of the game.
Over the years, I’ve had the opportunity to interact and support many gritty and persistent founders, who don’t like to take no for an answer. If a door is closed, they look for a window. If one investor network is not supportive, they find many more.
The courage, optimism, drive, and boldness of this special tribe called founders/entrepreneurs is highly infectious. Being an entrepreneur (founder) is possibly one of the best jobs in this world.
5. Negotiate, Negotiate, Negotiate – from the position of power.
Founders and early-stage investors are some of the best negotiators. Some examples:
A serial entrepreneur with multiple past exits was confident in achieving £5 million in annual revenue in a year. He had already received commitments from VCs, and so made an offer to angel investors without any scope of negotiation around valuation.
Similarly, another smart founder approached angels with a bridge round offer, wanting to share the immediate valuation upside and also improve his negation power with the VCs.
I’ve seen that angel investors do think seriously about such proposals compared to the founders who seem be at a disadvantage without many of these negotiation levers.
6. Show, don’t tell – as much as possible!
Some founders endlessly ramble about their own vision of the world and how they want to change it. Many of them are excellent communicators and storytellers, and investors do buy those stories depending on how bullish or bearish they are feeling around that time of the economic cycle.
Other smart founders prefer to show what they have built (either a tech demo or customer testimonial, data on outcomes) rather than telling stories. While there is no one-size-fits-all solution, depending on the overall picture, you can surely guess which approach works better, most of the time.
7. Storytelling works better than spreadsheets.
Good stories always beat good spreadsheets.
I have seen many startups with a number of issues in their business models. The founders were excellent storytellers and could appeal to the right emotions, so were able to raise funds. I’m not saying that spreadsheets are not important. But, stories must create interest in order for investors to go deep into the spreadsheets.
We are emotionally driven human beings and we tend to follow our beliefs. We get behind leaders who stir our feelings, not always thinking much about practical realities of the world.
Of course, both poets and quants have their space in this amazing world. But still, it helps to be good at telling stories in addition to having a good grasp on spreadsheets.
8. There are different investors with different investment styles.
Dr. Geoff Smart in his research paper “Management Assessment Methods in Venture Capital: Towards a Theory of Human Capital Valuation” talks about different VC typographies.
They are airline captain, art critic, sponge, infiltrator, prosecutor, suitor, and terminator.
More details are explained in this video.
Having closely worked with and observed hundreds of founders and investors, it looks critical to understand the investor types you are dealing with and plan accordingly. As far as investor returns are concerned, “Airline Captains” with systematic and process-oriented approaches seem to perform much better than the others.
9. “Cofounder Fit” can make or break (rather fail) the startup.
A few weeks back, I had a good discussion with an entrepreneur who is struggling with his cofounder. He feels cheated and that he is not being properly supported by his partner. He is possibly one of the 25 others who have raised such issues in a one-on-one honest discussion with me.
Research says more than 30 to 40 percent of startups (some reports say even 60 percent) fail due to cofounder conflict.
There is a scientific way to find the right cofounder using a scorecard around the following criteria:
- Personality Traits
- Time Horizon – Perception and Reality
- Commitment Level
- Value System
- Skill Compatibility
- Chemistry
- And few other areas
There is an exhaustive checklist and scorecard to make this easier. Founders definitely need cofounders and partners to run with to achieve their vision and dreams. You do not want to drag each other in different directions. I have experienced this first-hand on multiple occasions and is not worth it.
10. Role of a founder – You win or lose with your team!
“The role of the Captain is not to promote himself as a hero. The role of the Captain to make others heroes.” – Ravi Shastri (Indian Cricket Team Coach)
Very few investors are interested in lone-wolf-type founders and their startups. These types of startups are risky because sometimes one person exerts influence for the wrong reasons.
While many solopreneurs do well, building a strong institution in partnership with investors, and with great technologies, is a more dependable approach.
This is part 1 of the 3 part series on “Lessons learnt from evaluating 500+ global early-stage startups”.
About the author: Mahesh Dumbre MBA 2011 closely works with entrepreneurs and executives helping them achieve growth potential. He is an ex-Tata Group executive who enjoyed building businesses around the world (17 years in 8 countries across 11 industries, 80+ million USD value addition) as well as teaching and writing. He can be reached at Mahesh.jd@gmail.com.