As an angel investor, advisor, tech executive, securities lawyer and an entrepreneur in my own right, I’ve been on many sides of the table when it comes to venture finance deals. I’ve seen and participated in some capacity for hundreds of startups that successfully got funded, and I’ve seen thousands of startup pitches that fell on deaf ears..
What are key differences between those startup founders and teams who achieve success attracting the third party capital that is wanted and needed to execute an ambitious business plan, and those who don’t? In my view, it is possible to identify certain prominent patterns and narrow it down to a few factors. Here is a short list of things that make a key difference, and a few things that create red flags.
The Right Mindset and Market Knowledge
Successful startup founders and teams don’t think in terms of “might” or “like to” or “next year.” They are focused and 100% committed, both in the present and over the long-term. If raising capital is required to take a big idea and make it a reality, then raising capital must be a top strategic priority. Many startup founders have learned that raising capital is hard: it takes time and money to raise money. Prospective investors want to see “skin in the game”, in terms of personal investment, focus and commitment. If the founder(s) is/are not at risk, that is a red flag to third party investors. Another risk factor is when a founder is only working part-time or spread too thin. Building a startup requires immense amounts of time, energy and creativity, and if a founder is juggling multiple projects/ventures (many different companies), the probability of success goes down. That’s a red flag.
When it comes to venture finance, the right mindset also means good self-awareness and an honest understanding of what is “market”. Successful startup founders and teams should be optimistic and ambitious, sure, but also realistic in terms of valuation, amounts and terms and conditions. Sophisticated providers of capital know what is “market”, and it is a serious red flag if a startup is pitching a deal that is not within a “ballpark” range.
When a startup founder or team claims that his or her idea and venture have no competitors, that is a red flag. This is usually a sign that the startup founder and team have/has either not done enough market research or is/are delusional. The competition is whoever or whatever is supplying the current solution to a problem, whether that is a third party solution or simply the status quo (i.e., “business as usual”). If a startup claims that its product or service has no competitors, then maybe there’s no real “customer problem” to be “solved” eitherr. Of course, there are exceptional strategies that are “Blue Ocean” — creating and capturing uncontested market space and thereby making the competition irrelevant — but if a startup founder or team makes that claim, there better be back up to support it.
Finally, there are a lot of creative and innovative people who call themselves “startup founders” but are really more comfortable acting as “inventors”. Sometimes these people spend years and years pitching their invention or innovation as the key to a “soup to nuts” business plan to anyone who might be a source of capital, including business angels and other pre-seed sources of capital, without success. It has been my experience that sometimes, this type of entrepreneur may finally achieve success when they change their mindset from “startup founder” to “inventor”. Instead of trying to organize and capitalize a startup team to take the big idea from soup to nuts, they pivot their approach by staying lean and seek to find ways to collaborate with targeted corporations with existing distribution and customers. Such corporations may be happy to provide a dedicated budget (like an R&D expense for the corporation), and then commercialize the invention or innovation with the corporation through negotiated win/win arrangements.
Communication Skills and Empathy
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