What investors look for in early-stage startups

Brick wall with VENTURE CAPITAL spray painted on it

Stewart Glynn, 26 July, 2017

The startup investment world is filled with emerging technologies, exciting startups and entrepreneurs chasing ambitious goals. So what do investment managers like Steve Baxter’s Transition Level Investments look for when reviewing an investment in a technology startup?

1. Team

According to legendary Silicon Valley venture capitalist (VC) Ron Conway, this starts with you as the boss: “When you’re talking to me in the first minute, I’m thinking – is this person a leader?”

Conway extends this notion when bringing in other team members: “When you start a company, you have to go find somebody as good, or better than you, to be the co-founder.”

As most startups fail due to founder issues, it’s important to deep dive into understanding the team. Ask questions such as:

  • What are the founder relationships with each other? Friends, colleagues, relatives, strangers?
  • What are their skill-sets? Are there any gaps in skills? Do they have diversity of thought and background?
  • Does the team have entrepreneurial DNA – hustle, grit, ambition, execution?
  • Can this team become the market leader on a global scale, what sets them apart from others?

Look for a cohesive, engaged and passionate team to back, knowing that they’re in for a bumpy ride but are strong enough to weather the bumps and come out the other end with a smile on their faces after the tough startup journey.

2. Problem

Investors look for a strong connection between the team and the problem they are trying to solve. Think about why your team are better placed than anyone else to succeed in the chosen area. Would you spend your life on this problem? Given that the average time to a successful exit is over eight years, make sure you find a problem you’re passionate about on a personal level.

The second aspect to this, is whether there is a real problem that currently exists. Many founders wait too long to find out what customers really want or whether the problem exists. Get out of the building, talk to potential customers, launch your product before you are ready and start proving that there is a need for what you are building. Then come back to potential investors with proof that the problem exists and that your product can solve it at scale.

3. Big market

This may seem obvious, but very often we are pitched a niche idea and the founders have not thought through the general size and application of their product offering. Does your product have global application and is it globally scalable?

On top of this, how big is the market? Can your company earn $100m+ in annual revenue? Prove that you are the small fish in a big pond, but can become the big fish.

Most VC firms are looking to invest in businesses that can “return the fund” or deliver out-sized returns. Given the riskiness of the investment class (startups are high mortality businesses), VC’s need to have conviction that any investment can provide a ‘home-run’ return.

To achieve this level of return, the startup needs to be attacking a large market. The product offering needs to be able to achieve the level of traction necessary to reach scale and become a market leading force.

4. Timing

One of the most underestimated aspects of early stage investing is timing. The question that should consistently be asked when reviewing an opportunity is “Why now?”

What are the causes of this opportunity and when is the right time to be pursuing it? Factors such as technology adoption within the industry, regulatory changes, connectivity and shifting economics could have a significant impact on startup success.

Timing is very important. Make sure you understand why it’s the right time for your business to break into the market and gain adoption.

5. Plan and traction

VC’s always want to understand the pathway between the vision (top right) and the steps required to execute (starting point – bottom left). You  must have a strong vision on where you want the company to go and what that success looks like. Pitch a plan with conviction on what steps are required to get you and the company to that level of success. Show us the way and we’ll follow; but if you can’t effectively tell your story then don’t expect an investor to follow (or invest).

Traction is the other point. It is much easier to convince your investor on the plan if there is early stage traction with your product – be it with users, contracts, revenue etc. Make sure you track everything, so that you can show solid data and evidence of any traction with your product to date. Investors will get excited by momentum and be convinced that your plan is the right one and that you are already executing on it.

That’s it! The five major points we look at when reviewing early stage investments. I hope one day to be sitting across the table from you, discussing the global potential of your product and how we can help you get to global scale. Good luck – onwards and upwards!

Stewart will be a guest speaker at our Business Leaders’ Talk (BLT) event on Thursday 10 August, 2017.

Author

Stewart Glynn

Stewart Glynn

Stewart Glynn is a QUT Business School alumnus and VC Investment Manager at Transition Level Investments.

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