Having reviewed more than 1000 investment cases over the past 3 years and with a conversion rate from evaluation to investment at around 2%, it’s not a random coincidence to get into the “why” part of the discussion. And by saying why, we mean… why you don’t invest in my business? And the “because” here may be more than 30 different aspects standing alone or in various combinations, giving us some billions of reasons hiding behind this seemingly simple question.
So, having been in the place to answer this question for a four-digit number of times now, and actually beholding that the phenomenon has still exponential growth, we decided to put down on a list the 11 main facts that exist in a new venture and shout to go away.
And here you are…
#1 The “single-founder” effect
Decided to start with this, as it happens more often than expected. We frequently encounter founders with no co-founders and, many times, even founders with no founding team. They sometimes express that they will hire a key skill, such as a CTO or a BD guy to prepare pitches and presentations. Well, this is not how this game is played; great products need to be built and great products need to be sold. Who is going to make all of these? It’s going to be you, right? And some people you may hire soon, that’s why you need the investment for. Hmm… yellow flag.
#2 The “small TAM” effect
Okay, here we are getting serious, and this point is related to the nature of the VC business. Venture Capitalists have a certain amount of capital under management (some of which may come directly out of their pockets, but the majority does not) and they need to ensure returns that may start from 5x and go up to 15x or more. So, everyone needs to bet on a winning horse. And how this will happen if there is no market that cares and wants to pay for the products in their portfolio? And just to catch your next thought… it’s billions. If it’s not, then no one listens.
#3 The “no validation” effect
As pre-seed and seed investors, we very often meet founders that have not launched their products yet. And that’s okay! What is not okay is not to be trying to get an early proof of concept; not to try to be sure that you’re on the right path; not to try to validate the hypothesis that the client you are targeting would be interested in what you’re building. And what’s the best way to do this? Make him pay! Bring us some proof of revenue, active contracts early on. This is a direct way to grab our attention.
#4 The “I am one of the same” effect
As venture capitalists are searching for fast and high growth, they look for proprietary and defensible technologies and products that cannot be easily copied and are able to scale over the next 5 to 7 years. Common products could be also funded but we need to see some other types of innovation in these. FlexCar is a very good example of that point; they have democratized the car leasing market in Greece by introducing business model innovation in a domain that operates for decades.
#5 The “there’s no competition” effect
Another deal-breaking point here. Given that we receive a big number of cases every week, you may imagine that there are no many busines ideas that seem completely new to our eyes. So, when you are invited into a f2f meeting, you need to think it twice before arguing in favor of that there exist no competitors. Chances are that they do; and chances are that some of them have reached out to us before you did. And no one wants to invest in a team that is not aware of its competition.
#6 The “no skin in the game” effect
Starting your own business means sacrificing many things; but first, personal time and money. Noone would invest in a company where the main founders are not committed enough to work full-time and invest a significant amount of time and money themselves. If the “single-founder” effect was a yellow flag, this is a red one. And believe me. We had to deal with that many times in the past.
#7 The “no plan” effect
As mentioned above, early-stage VCs target multipliers of at least 5 times their money back in the next 5 to 7 years, meaning that most of the times they are looking for a fast way to scale up. It’s not that the roadmap needs to be clear since day 1, but it needs to exist in order to adapt it. So, by not being able to answer the “how are you going to make it” part of the discussion, the investment seems to go away.
#8 The “you ask too much” effect
Well, another part of the story, a two-sided one. Entrepreneurs raise their companies as it was their children. And would you believe that your child is not the prettiest or smartest among them all? It is quite common that founders set up valuation thresholds way above than investors or the market believe. The value of a company is based on track record, proven accomplishments and, of course, its potential. In addition, they tend to ask too much money for their plan, many times just to feel safe. And this is like expressing openly that they cannot handle insecurity. Hello! Insecurity is in marriage with entrepreneurship. These two points may really turn an appealing investment opportunity into a non-appealing one.
#9 The “uncoachable founder” effect
Again, very often in pre-seed and seed investments the role of the investor needs to be the one of the coach as well. If a founder is not able to listen to advice, discuss her plan and adapt fast, this is a sign that she may not be able to listen to the market feedback as well. And, indeed, this is a reason why two people cannot work together.
#10 The “what is lean?” effect
One of our core values and mottos in Uni.Fund is “cash flow positive”. Our portfolio companies know that well… You may think that a startup in its baby steps cannot be cash flow positive; and you may be right. You may think that startup growth and “cash flow positive” are difficult to be combined; and you could be right as well. But the message is not that; it’s keeping your burn low. Net burn is directly related to your runway. And runway means a company’s life. As many things could happen unexpectedly and the market reaction cannot be fully predicted, lean moves and low burn rates imply more stable steps.
#11 The “we’re not the right investor” effect
And now we’re getting into the “it’s not you, it’s just us” part of the discussion. During the past 3 years we have seen some really good cases, with strong founding teams, big TAMs, validated products, and many more. But we decided not to invest. Why? Because being a pre-seed investor requires a great hands-on effort into supporting the team in its first steps. And we really feel more comfortable to do so in markets that we are networked and in products that we understand.
Well, having written all these, we could not assume that, if you adopt them, you will receive a VC investment. But you’re in the right track of creating a sustainable business. Thumbs up!