Is it that simple? Let’s try…
I’ve explored before HOW startups fail and article after article after article ponders why they fail. I hope we can agree on a simple fact that IF a startup is going to fail, investors would rather not be involved. Yes?
So might it be as simple? Investors consider countless data points, personal feelings, and public opinions when considering an investment, might we be able to distinguish, for you, a list as concise a FIVE?
Number 1: Nothing Defensible
Please, please please, read this: The Pitch Deck Slide That Can Make you Look Like a Moron.
You have competitors. Your competitors are not only startups. The more success you find, the more competitors you will have. And by the way, there is this notion in entrepreneur of “second mover advantage.”
“Being a first mover is often attractive to entrepreneurs and investors because of the upside potential and ability to capture and sustain market share. However, being the first to market with a wildly innovative idea is also risky. You don’t know a) if customers will view your product as valuable, b) if it’s something that customers can/will buy, c) how to acquire customers, and potentially d) if it’s even a problem worth solving in the first place.”
– Mike Fishbein
You need a moat.
The moat might be a patent; but likely not, you can’t afford to defend the moat of a patent.
What of your team, your marketing strategy, or your partners, establishes your moat?
Number 2: Small Opportunity
This issue is understandably where many business owners and founders get frustrated, “why can’t I find investors for my business!?”
Because you’re thinking small.
It matters. It might not be fair but it matters.
In Venture Capital, investors are seeking a 20X return on their investment.
Do the math. If we’re to put $1,000,000 into your company, we want to get $20,000,000 back.
Now, you might be thinking, that’s unreasonable! What if we’re profitable! “Venture Capitalists only care about really big companies, that’s selfish!”
Nope, here’s the thing… Venture Capital funds STARTUPS. Overwhelmingly most startups fail. And Venture Capital is in the business of managing and raising money for such things.
Appreciate that. Venture Capital is a business. If it don’t work, it don’t work for you.
When most of the investments are just lost, investors need to see that every investment is at least capable of delivering that kind of return. Why? It offsets the losses. It’s not selfish, it’s not evil capitalism at work… banks are guaranteed a return… investors in Wall Street have a pretty safe bet… MOST of what Venture Capital funds is completely lost – ergo… go big or go to the bank.
Number 3: Not the Right Team
Are you VERY aware of your shortcomings?
Reminder, we’re exploring how not to fail.
One sure way to fail? You’re a sole founder or duo and there is a glaring hole in your ability to make this work.
Why Do Most Startups Fail? Because Founders Get Stuck Making This 1 Shameful Mistake. Let me cut to the heart of what Nicolas Cole summarized there: Startups fail because their founders often lack a sense of self awareness.
- Most startup founders get stuck on their original idea and refuse to pivot.
- Startups fail because founders get stuck in their egos.
- Founders fail because they want to believe they have it all figured out, even when they don’t.
- Founders fail because they want to be seen as the smartest person in the room–and not seen as the student.
- Founders fail because they aren’t a team committed till death do they part.
Number 4: The Investor Isn’t Relevant
Here’s a short list of some of the inquiries I’ve received in the last week:
- A locally owned food trailer raising money to open a restaurant
- A documentary film seeking funding
- A medtech solution related to heart disease
I know nearly zero about those respective sectors. Granted, MediaTech Ventures knows a lot of potential film partners and sure, I know a lot of health industry VCs, but generally speaking I know nothing about such things and there is nothing about my profile, my work, that would suggest otherwise.
The VCs you want are focused on and experienced in the work you do.
Besides fit, they might be at the end of their fund, again raising their own capital and unable to invest. You might be too early stage, or too late stage, for their fund. They might be invested in something they consider competitive.
Investors aren’t banks handing out money because you can return it. Do your homework and find a partner.
Number 5: Lacking Traction
Customers. Right?
Bullshit.
Sorry for that. I practically NEVER swear, particularly online and in written word; but I’m getting fed up with founders being advised that traction means having customers.
Why are so many ventures struggling to raise capital despite having customers? Because having customers only proves that you can sell something of value to someone. Good for you, you’d not be in business if you couldn’t do that.
Do you have a team? Advisors? Do you have an audience? Is that audience growing? Does the media, even local media, like covering you or your work? Did you get accepted into a great incubator? Did you win some awards? Perhaps you have corporate partners or Letters of Intent (LOIs) that affirm others want what you’re doing?
Traction is never one thing and any evidence of traction is only as valuable as how well it overcomes investor concerns and objections.
Typically, what’s needed isn’t MORE but rather something else. Next time an investor advises that you need more traction, don’t ask them what more of, ask them why.
Thanks for sharing Paul. I’d add that these days a good way to build a moat is to collect a unique data set that’s hard for others to replicate.
Absolutely! Great example
Always appreciate your VC insights.
Maybe this should also be a paid product course as prep material… if only for basic awareness… before going into FI.
Thinking about getting a lot of such things online. Someone should 🙂
Excellent! More entrepreneurs should be reading your posts.
Great article, Paul!
Thanks for the short and simple post. Glad you let the “B.S” word fly, it drive home the point!!!
Our town in particular where it seems to need to be said Bronchae! Thanks
Thanks Paul O’Brien, this is super helpful!
Good stuff
This is important for entrepreneurs (like myself) raising capital to see. Traction can be accomplished in more ways than one.
It’s a reminder to the things we are succeeding in. There have certainly been periods where I focused so much on money raised, we weren’t celebrating all of the traction that we have been making. Because I felt other investors only cared about one thing: investor traction.
Team, advisors, growing audience, media coverage, grants, scholarships and partnerships are all major wins. ?? thanks for the post.
Some of the best advice I ever received: build the company that investors seek out! They’ll come to you 🙂
Paul thanks for sharing and yes, I would like to take this opportunity to learn from your hard won experience and perhaps even one or two others could learn from my sharing with you.
Point number one: we all have competitors. Whoever says they don’t is either a dreamer or so dang smart they should work for DARPA, Defense Advanced Researh Program Admin. You all know the folks who look at military things years before Congress ever hears about them cause they are still on the drawing board or in testing stage.
Point number two: small opportunity. Yes, I am a very too small operation for venture capitalists as they want to drop $10 million or more. However, I feel that over the course of five or seven years I could more than 20x. Any suggestions besides suck it up and that is just the way it is. Score advised me to just search for an individual and take things from there. Perhaps we could discuss my ideas for this offline?
Point number three: Team building. I am currently seeking the advice of Mr. Dan Pena on how to do this. I don’t want a friend just because he is my friend but rather someone who can bring something to the table above and in addition to what I can. I don’t mind teaching him/ her what I know about my industry so long as they have a valued skill or something else to offer. Your take?
Rethink your presumption that venture capitalists want to drop $10MM or more. Not remotely true (though perhaps true in your sector). VCs routinely invest only 6 figures. It’s a question of relative value and share along with outcome potential. Also appreciate stage, use of funds, etc Investors, typically, aren’t going to invest to pay for salaries, marketing, etc. In what are the investing to take you to the NEXT stage and enable that competitive advantage, market share, and far greater valuation that you wouldn’t likely otherwise be able to get? Lastly, keep in mind, VC is in the business of funding opportunities that deliver returns, they’re not banks nor grants… meaning, they’ll WANT to invest in you with that established. If they don’t yet want to, explore what’s missing in what you’re doing. Old sage advice about VC: if you’re having to seek them out and convince them, you’re doing it wrong – your goal is that they should seek you out and convince you.
Team building? Treat potential team members, cofounders, and advisors as investors. Check this out: https://medium.com/@seobrien/how-do-you-convince-someone-to-join-your-pre-revenue-startup-as-an-employee-advisor-or-board-4955d9501817
Part 2
Point number four: investor must have an interest and somewhat of a background in what I am doing. Short of going to the premium version of LinkedIn and searching by, for me, as of yet undetermined set of criteria how or where would I find such a person? I am currently attempting to build up a digital history here on LinkedIn so any perspective people who come to me will find something more than just my name and other basic stuff. I have seen far too many times someone says hi, how are you, communicate for a short time and two to seven days later ask if you have $100G or more to invest in my idea.
Point number five: building a team or audience OR better yet both. I am working hard here on LinkedIn to create an audience and followers. I spent months trying to get into what I believe are groups of my peers who share my interest in how I would like to make the world a better place. Soon I will invite to join my group where I show off what I can do and invite them to do the same.
Genuine VCs are known for it. It’s their livelihood. So the tried and true resources online should easily uncover those that would have an interest in your work – Google for them, Wikipedia, Foundersuite.com is pretty helpful, and yes, look for them on LinkedIn (you don’t need Premium to do that).
Connecting with them is a different question. Create value such that they’ll want to connect with you. VC doesn’t seed fund the start of things. How you create that value is a different and personally relevant question we can explore here, that’s what your team, or consultants/advisors, figures out. BUT, once you have figured out who might be relevant, note that VC Firms have Associates and Principals who’s job it is to find and connect with opportunities. They’re your lower barrier to entry to getting to know the VCs.
Angel investors are a different story. Angels are not as public about it (despite what Angel List, your local Angel Network, or some incubators might suggest). Often the best Angels who help you start something are those who WORK in your industry. Executives at related companies, former founders in similar things, etc. Also not hard not figure out WHO when you discern those companies.
Nice post, Paul. Shared to some entrepreneurial friends of mine and they agree. Keep up the good work—I really appreciate your efforts!
Quid pro quo. We get a lot of CRM inbound fluff from VCs especially now that it’s summer. I don’t know about most startups but I’m not in the market to respond to inbound auto emails from undergrads. Also, to be frank if this is how an investor sources their ideas I question their due diligence process.
Very well said. I find that 90% of the inbound I receive from investment sources is really coming from people with revenue based financing available; i.e. not actually VCs.
None of the VCs I know send out offers to fund. Good advice for founders about discerning the credibility of, intention, or experience of a “VC” … Good ones will never cold call you. If Sequoia wants to fund you, they won’t have an associate send you a auto fill email.
“Next time an investor advises that you need more traction, don’t ask them what more of, ask them why.”
Once that’s known, I’d add on “What milestones make sense for us to target?”
Boom! YES!!
I love sitting with a founder or startup when they’re talking with an investor and inserting the provocative and open ended question, when the investor shares the all too common advice, “focus on getting more customers,” — Why is that?
I can count on one hand the number of times they have a valid answer to that. Most look a bit dumbfounded or give some vague platitude about how wonderful it is to have customers and revenue. Duh, of course it is…. WHY are YOU advising that??
I agree, this would go along way toward heading off advisor whiplash.
Outstanding article Paul. I shared this out to the Austin Top Guns Group that we are reinvigorating.
Awesome, I’ll get back in and reinvigoratimize it!
Five great points to consider when seeking an investor.
Hay you have described very well reasons. It will help me for my successful entrepreneurial journey to build a successful startup.
Before this article I read following article. He had explained that why most startups fail. So tell me about that is it true or not.
Url:- https://www.asktalks.com/2020/07/entrepreneurship-startup.html?m=1
Hope you will reply
Thanks,
-Shubham deshmukh