Three things matter most to investors. THREE. You read a ton of content about validation, MVP, customers, revenue, etc. All of those perspective are platitudes; they’re meant to inspire you that you CAN or teach you how you MIGHT.
End of the day, three things matter, period:
- Outcome. Can this exit? Will it? No ROI for investors, no investors.
- Competitive Advantage. Can you develop and maintain a market? If you lose to competitors, no investors.
- Team. When all else fails, this can overcome the challenges in the first two cases.
So, how are startups able to attract huge amounts of venture capital investment even when they are in the beginning or a nascent stage?
They work backward.
An experienced, invested, passionate, committed, and capable team is in and of itself fundable.
These are, despite what most want to think, incredibly rare. Most founders want to retain most of the company, do it themselves, or let their ego get in the way. Most startups are tech founder heavy and have no one running marketing and business development. You might as well go home.
Working out a competitive advantage starts and ends with Marketing. Roughly .00000% of all pitches I heard have a solid understanding of their market and competitors. Most competitive analysis (analyses? analysesises?) are a joke.
If your competitors will be you, you lose. Period.
WILL you exit? Not could you. Not “we have options.”
Do you intend to, is it possible, and are you chasing that? If no, find other sources of capital.
One is critical. Two is largely dependent. And with three, we can find our way to one and two.
Great article Paul, this is why the Army believes that leadership is more important than technical or tactical competence. Regarding your point on business development, I love the quote, “Your algorithm isn’t a company.” However, I’ve discovered that recruiting and retaining a winning team isn’t intuitive to the majority. Someone still needs to field and coach the team. Yet, why do so many teams struggle to have a winning season? My experience with Bowl teams is that they excel in these three areas: talent management, work ethic, and designing a play book tailored to their players strengths. I have to wonder if more startups would become successful if they had access to the right players earlier in their development, and if this could be an area where AUSTIN Ecosystem actors could improve by “deliberately” teaming to support mutual interests? I suspect everyone may nod their head in agreement but the question is who can pull it off and how?
“I have to wonder if more startups would become successful if they had access to the right players earlier in their development, and if this could be an area where AUSTIN Ecosystem actors could improve by “deliberately” teaming to support mutual interests? I suspect everyone may nod their head in agreement but the question is who can pull it off and how?”
I still passionately believe so; through specialization. The old notion of T shaped skill sets – broadly applicable in innovation and entrepreneurship but deep where Austin has strength and can align experience, capital, and networks.
IMO it also requires building your whole company around the exit – which is not a bad idea if that’s your goal, but its almost always incompatible with the idea of building your company around something else (customer satisfaction, employee balance, craftsmanship, etc). Neither approach is wrong, but trying to do both is a recipe for disaster. Again, just IMO.
And in this case, just like working with PE firms or anyone else, the exit notion should include a pretty firm timeline (which again makes things like investing for massive payoffs 2 years after the exit time a bad move, even if it would absolutely be the right thing for a closely held long lived company to do).
Indeed, not right nor wrong; or better nor worse.
An investor that won’t get their money back, plus more, won’t invest. It’s really that simple.
Paul O’Brien Took me a few ventures to really internalize that myself.
Lol. Yet again, investors/PE/VC are smaller, faster, more risk tolerant banks. If there is no chance of repayment with interest, there are no funds.
Yes. You have commentary on that?
The mistake lies in faulting the capital and not teaching entrepreneurs accurately how this all works.
You need capital to start a business that won’t likely be able to return capital? There are grants for that.
I have so much commentary it isn’t even funny. I’m not gonna bore you, though.
I’m only bored by the Kardashians and sports on TV
I completely agree with the whole not teaching entrepreneurs how capital works. It’s insane. Some of them legit think PE/VC money comes with only strings for control and some light interest with the majority being paid back on exit. They don’t see how that all adds up and how insane things like participating and preferred interests basically turn them into little cash generators for the VCs. Which is fine… In some cases. Gotta give to get but insanity seems to abound in early stage financing.
And sweet baby Jesus were you on point when you discussed not having a sales/marketing person on the team.
Blowing your inbox up, Paul O’Brien.
Good post Paul
I’d put my team against anyone! Amen Paul. ?
The 3 things that matter the most, unless you make a list of 4 things. Seriously though everything comes down to ROI, but 1 item isn’t a list…..
I stand by it. A good venture in a competitive market can exit and still not dominate the market. Knowing competitors is how you both ensure you don’t lose to them AND find alternative exists.
Team changes. Most founders will quit if their co-founders bail. Tenacity wins the day. If you’re in a venture withpartners who can’t / won’t get you to an exit, change the team. Some ownership of a win is better than sticking with a startup that will struggle.
Love the post & the thorough write-up, Paul. I’ll avoid going on a long rant about the critical importance of Team, what a great team looks like at various stages, and all the ways founders & hiring managers get it wrong (inflexibility in role definitions, thinking they can hire just anyone in so-called “unskilled positions”, and just a few dozen other ways) and instead will just leave Bill Gross’s short (6:40) TED Talk here to complement/supplement your post
https://www.ted.com/talks/bill_gross_the_single_biggest_reason_why_startups_succeed
Don’t let the title fool you. He ranks multiple factors.
Thank you for this. I was asking myself this just yesterday as we are in our Series A. I’ve noticed a ton of companies raising $20-$50 million and don’t even have a website so this helps.
Just an opinion here … but first and foremost … all that matters when I invest … or operate … is the team. Markets often don’t exist for bleeding edge “stuff” … or there is a “transition timing” issue between … for instance … an old computing platform and a new computing platform. The concept of starting a company with a known exit type and time is kind of funny to me … as that might as well be summed up as “Austin perspective vs. West Coast perspective”. IMHO … building great companies with great teams is what creates value and valuation … and exit optionality … and whether a sale or a going public end state is achieved … is often unknown until years after founding a business and allowing the markets to unfold. Unlike what I learned in business school … there are no sustained competitive advantages over time. Rather … there are unfair competitive advantages that require constant pushes to preserve, maintain and expand them. Some businesses can naturally do this more than others … and some businesses can naturally do these longer than others. But generally speaking … *all* of them disappear or change over the mid and long term … as we see with the world’s most valuable companies list over each ten year period. The best team often wins … because they are better adept at adjusting and optimizing over time … including the ability to do hard forks and pivots if the empirical evidence of the market dictates.
Yep. Frankly, I think, not inconsistent with my point. I wanted to drive home that a team that has no intention, desire, or ability to exit, doesn’t create that option. Of those things, what’s in control of the venture is the team… “work backward” – they make all that possible… or not.
Always better to be lucky than good … but you can really excel if you are fortunate to be both. Market timing is mostly about Goldilocks and the Three Bears … as some great companies and ideas failed by being both too early and too late … when you really need to be just right.
Just watched a pitch that made zero reference to exiting and claimed there was no competition. Sadly, it was fourth one this week.
I’ve stopped counting them Robert Warren 🙁 I have a much greater appreciation, today, of why venture capital firms have to have enough capital managed in order to employ Principals and Associates. GPs just can’t keep up with the amount of emails and pitch decks to which they’d like to reply with guidance; but often can’t even get around to replying to.
Paul O’Brien Starting in January I’ll be offering seminars and weekly officers for entrepreneurs at the local incubator to help solve the issue.
“Most startups are tech founder heavy and have no one running marketing and business development. You might as well go home.” I’d love to buy you a drink.
In my town for SXSW? I don’t have plans to be back your way soon
Paul I’m planning on going. I used to live in Dallas and visit from time to time.
The bog question is, what is a start up? a room full of graduates fresh out of uni, or a group of people who want to make physical product?
A distinctly innovative new venture. I don’t think it’s a matter of who’s doing it. A new venture that’s already a common business isn’t a startup; it’s a new business – when the model is known and established, you can learn from your predecessors. If you’re breaking new ground to figure out how the business can survive, it’s a startup.
Ok looking for code writers and clean hands, message understood, over and out………..
What do you feel about sharing economy startups that marry common/trendy business models to new industries? Or in reverse, marrying new business models to common or competitive industries?
I’m not in to trendy, i’m in to whats made in Great Britain and sells outside the EU.
As good as exits are, I think most investors (perhaps non-institutional angels/founders) should be contented with reasonable liquidity for their shares well beyond what they paid for them. Would mean the company is doing well, and they can keep their chips invested in an unique opportunity. There are many people wealthy from private stock holdings which might be traded only rarely. Take the AirBnb rich, they don’t even ever need to IPO I believe. The Uber rich on the other hand..
Indeed, I’m vastly simplifying to drive the point home. There are actually many ways investors get their return…. if the business fails, we’re left with IP, and audience, a good team, etc.
Still, it starts with the appreciate that investors MUST get a return. They don’t take equity in a company just so it can be profitable and successful; if that’s the pitch, you won’t find many investors.
“Shoot for the stars and land in the moon” is very apropos… show me your intention to exit and ability to get there; heck, IPO is rocketing out of this world. If you’re not on that path, you can’t fall short and end up on the moon… something which I’d absolutely be happy with.
I really like the way Anthony Hopkins put it recently Paul: “If you chase the money, it’s not gonna work. And if you chase success, it’s not gonna work. You just have to chase whatever you want to be, but live it as if it is happening now. Act as if you’re already there, and it’ll fall into place.” The more folks that live like this, the more great outcomes they’ll be in one way or another IMO.
Simple and direct. No roi of any kind = no investors of any kind. Marketing, as distinct from advertising, should be done as early as possible and as often as possible without becoming a pain in the rear to prospective investors. Allow perspective investors to see you “at work” long before you even plan on asking for any money at all. Allow them to see you as a human being, share both successes and failures with them and most importantly when a challenge hits (they always do and at the worst possible time) let investors see how you pick yourself up and move on.
Literally just had this conversation with two young(er) founders of a tech company in the music space….especially on the exit issue. Investors are not here to sit and hold, forever. They want/need a return on their investment. Otherwise, seek a loan.
Let’s connect in Austin during SXSW.
Let’s connect before SXSW. We have big plans for then; worth talking soon. cc John Zozzaro
I would agree with the above statements but with some nuance, obviously from the numbers the qualifications, expertise and capabilities are not all judged at the same level.
Developing an exit strategy can be refined over time. It could take 5-6 years to exit and potential acquirers could change over that time but having a plan for exit options could be a feasible approach.
We’re going to IPO is a bit of a pipe dream.
Is there potential for a significant return and can this team or business achieve some version of that return potential.
Also, as someone with two decades of marketing experience, I appreciate the comment about the importance marketing plays in startup success!
That fact has really been lost in society Tisha Hulburd, hopefully we can bring it back to bear