If you are an entrepreneur, step into the shoes of an early stage venture capitalist. Imagine that you are responsible for every dollar you invest. You get into a meeting with a startup. After this short conversation you want to make the first assessment. If you invest you will have to deal with these founders for another 3 to 5 years. Sooner rather than later you will decide if you will join these comrades and go to war together. What behavior will make you turn the proposal down and what will encourage you to go forward?
As you may or may not know I have recently become a venture capitalist at Data Ventures. As a rookie in this area I still have a pretty fresh view on the way startups and investors interact. This year I have scanned more than 100 pitch decks and spent more than an hour in a meeting with over 30 companies. Below I have listed the following situations which raised a red flag, that swung the desicion not to take a risk and ended our talks with these companies.
1. Knowing their business to the core – at one meeting we asked the founder of a 10 people startup about the salaries and incentive model of his sales team. First he shot a very high number that surprised us, so we dug deeper. As we pushed harder he had to look to an Excel sheet to find the actual salary of a certain sales person which happened to be four times lower than the number he had mentioned before. We couldn’t risk going on a journey with someone who does not know the fundamentals of his business by heart, because we assume he could show a similar careless attitude towards other important details of the company.
2. Focus on one product & market – once we asked the founding team about the first market and value proposition they wanted to test. They seemed to be afraid of focusing on a small test market and they kept underlining how starting small will make them lose the opportunity in a bigger market. It is OK not to know exactly who your customers are before you start selling, but it was too risky for us to deal with a team that was either too hungry or too impatient to actually understand the need to focus on getting their early adopters on board.
3. Side-projects – multiple times we have come across companies that either had part-time people in the founders team or have been part of a larger group of companies. In the first situation we didn’t enter because we assumed that when the problems come the part-time founder will lack 100% focus and may end up jumping back on board his previous job instead of pushing harder to deliver in the startup we invested in. Being part of a capital group is a risk as the company might not be fully independent function-wise and also it might mean the risk of choosing the sister company‘s services instead of choosing the best provider on the market.
4. Real relationship – It is all about business, but we need to trust each other and have mutual respect if we are about to go through tough times that are part of every startups‘ journey. One company we met was very promising and the communication was nice, fast and cordial. However, at some stage they started bragging about other investors interested in their venture. We sped up the process and sent them our initial offer. They didn’t even take the chance to openly discuss the offer or explain their position. They just stopped replying. Good for us.
5. Team competence – if we see a one-founder “team” or the CEO does not let other team members talk freely — this is a red flag. In other cases we see at first glance that some part of the business, e.g. lead management, is far behind the rest of the organization and requires a solid hire. If the founder is unaware of this incompetence and does not respond with valid arguments against our concern — we don’t follow through. Very often managerial incompetence is the highest risk in the venture. Hardly any people change and if they do, it takes years – far too long for the company to survive.
Now take off those investors shoes and return to your startup self. Try to look at yourself and the way you think from an external perspective. Be tough on yourself and don’t leave any stone unturned. Test yourself for honesty and integrity. If you see that your startup is missing something, don’t hide it, address it. Go to the meeting prepared, having in mind the perspective of working together for the next few years. You will save your time and it will help the investor make the right decision.
Share your experiences about dealing with venture funds. What do you dislike about their behavior? What can we do to be more helpful? What other stories do you know?
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