As 2018 came to a close, we saw some good summaries of early-stage investing for the year and top venture capital (VC) firms-see this link to the top 100 VCs from CB Insights. It was certainly good to see Indiana-based @ElevateVentures on the list of most active investment groups from Pitchbook. We frequently get asked two questions from members of the startup community:
1. As an angel investor – “What should I be looking for in an investment?”
2. From entrepreneurs - “What are early-stage investors looking for in an investable company?”
We hope this blog sheds some light on both questions.
You often hear early-stage investors talk about their investment preferences as follows: “I’d rather invest in an A-Team and a B-Product than an A-Product and a B-Team.” But what does that really mean? Does the founder have to have a mohawk and say “I pity the fool?” (If you are not familiar with this reference, check out the TV show “The A-Team”) Not exactly, but forgive the dated reference to Mr. T and read on if you want to know more about startup investing and investors.
Ventures almost never move forward with their initial conceptualization of product and market intact. Finding product/market fit is elusive - check out our previous blog post for more info on this. For most startups, the product and idea will likely evolve. But, the team will for the most part be the constant that is responsible for navigating startup uncertainty. So let’s try to disentangle what an “A-Team” looks like in the startup context. We have previously described the entrepreneurial task as systematically navigating uncertainty across the domains of technical, marketing, human, and strategy challenges.
An “A-Team” is one that has: 1) demonstrated the ability to navigate uncertainty with their current or previous ventures and 2) a plan for how to systematically navigate uncertainty with their current venture to limit the odds of sinking. When looking at a startup team, this might trigger the following questions:
Is the founding team really a team? If the founder consistently pitches the venture as “I,” he/she has likely not embraced a founding TEAM concept.
Does the team have experience in this industry? Most investors look for industry experience to signal that the team knows the market and its challenges.
Is the team well-rounded in terms of experience and training? A diverse team is more likely to be able to anticipate and resolve uncertainty icebergs that sink startups. This can be accomplished through advisors to some degree.
Does any team member have experience with another venture navigating uncertainty? Failure is not bad here—it provides context and an appreciation for startup uncertainty. But learning from failure and getting better is key. In fact, beware the founder who has had ONE big success and no failures.
Has the team shown an ability to navigate uncertainty with this venture? By the time a venture is seeking outside funding, it is almost certain that they have had some missteps and had to “pivot” or change direction. Have they done so thoughtfully? What have they learned?
Does the team have a plan to navigate uncertainty moving forward? “Pivot until something sticks” is not a plan. A savvy and successful startup team will have a systematic approach to tackling key decisions regarding product/market fit, launch beachhead and early growth plan, and scaling production, sales and marketing. Investors look for an experiment and test approach to decisions. This is much more important and nuanced than a financial spreadsheet.
Throughout our book “The Titanic Effect: Successfully Navigating the Uncertainties that Sink Most Startups,” we incorporate some guidance for investors, advisors, and supporters of startups with a lookout icon. They should help investors spot red flags—think of them as a distant early warning system for startup problems.
Most investors recognize that investing in startups has a low success rate—as many as 70% to 80% are likely to fail and return the big goose egg ($0). But by investing in the right team, one that can successfully navigate uncertainty, you maximize the odds of seeing some return from your support. We hope our book and ideas help early stage investors and supporters improve their odds at picking the golden goose over the goose egg! And we pity the fool who does not carefully evaluate the startup teams of their potential investments.
In case you are really enjoying these blogposts and want to learn more, you can now pre-order the book on Amazon - click here to get it .