When Your Startup is Fundable but You Aren’t
You may have heard that the most important criteria of investors is the founder and team. They bet on the jockey, not on the horse. Startup success is more about execution, less about great new products and untapped markets. What happens when investors like your venture but are leery about investing in YOU?
I’ve been there. I was told by a number of Silicon Valley VC’s:
We love the technology, we love the space, and we love the potential for a big return on our investment. We just don’t think you’re the right guy for the job.
I got the money anyway.
Allow me to share common reasons why investors might think you are not fundable, and how to overcome their concerns.
Why You May Not Be Fundable
1. Youth and inexperience. No breadth.
If this is your first venture and you have no significant work experience, most investors are going to be leery about your ability to build a business. Anyone can start a company — it’s easy. The hard part is turning a company into a profitable business. That takes know-how. If you are an aspiring entrepreneur right out of college and have no work experience, aside from summer jobs or internships, see number 5 below.
2. No track record in the space. No depth.
This is a big one and the reason I had trouble raising capital. Even though you might have considerable work experience, including management experience, most investors want to see relevant experience in the space you are competing in. The way to compensate for lack of practical experience in the industry and market is to “get smart” about the space and surround yourself with people who are experts. See numbers 4 and 5 below.
3. Poor vision, strategy, milestones and plan for taking the business forward.
How to get from A to B to C….to Z (exit) is the hallmark of a great startup team. As the founder and leader, you must be able to articulate a clear vision and the path to achieving the vision. Many first time founders are good at pitching a big idea, but are hazy about how to implement it. That makes investors nervous. They want to see a product roadmap and a go-to-market plan. They want you to identify the key milestones along the way. At a minimum, you should have a three year business plan with defensible assumptions and reasonable growth projections.
4. Unable to answer basic questions about the business model and the key metrics that drive the business.
Having ONE validated revenue stream is a key consideration of all investors. If you spew a smorgasbord of possible ways you might make money, investors will conclude you have no idea how to build a business. Non-fundable founders grasp for straws when asked this question. “We’ll sell subscriptions…and sell advertising…and have a trial version that upgrades later…and maybe do some data mining and lead generation.” Fundable founders have not only validated one reliable and predictable revenue stream, they also know which metrics are the most important to track, measure and improve.
(I’ll cover more on business models and key metrics in my next post because they are so fundamental to raising capital and building a successful business.)
5. No team; no advisors.
Solo Founders are not fundable. Teams are fundable. There is so much that needs to be done to launch a business, and so many different disciplines required to build it, every smart investor knows a balanced team is required. What a good founder does is to hire, align, empower and incentivize the team. A good founder also recruits good professional advisors (legal, financial, IT, etc.) and sometimes a separate board of advisors to facilitate specific strategic objectives.
6. Poor presentation; inability to inspire trust and confidence.
This one is hard to quantify but very real among investors. They think the product / technology is amazing. Good intellectual property; perhaps some early adopters who have validated the market potential. But the founder is just…well…blah. Investors don’t get a good vibe. It’s often poor personal chemistry, not business fundamentals, for why some startup founders fail to get funded.
7. Questionable past: background check reveals financial, criminal, ethical problems, or poor judgment.
Everything about a founder is discoverable these days. Most venture capital funds (and some angel investors) employ services that conduct deep background checks on the founder and other key members of the team. In one of the company’s I founded I almost lost funding after the VC discovered that one of my VP’s had been fired from a previous job for submitting a false expense report. I never knew that; never bothered to ask about skeletons in the closet.
The VP thought it would not be discovered. It was. It reflected poorly on me for not thoroughly vetting my team. The VP was let go, not for having made this mistake in his career, but because he lied about it when asked by the VC if there was anything in his past work experience that might reflect poorly on him. He said no. He lied. Not trustworthy.
This brings up a related lesson for why some founders aren’t fundable. Investors rarely ask a question they don’t already know the answer to. Don’t lie. Don’t try to bluff. If you don’t know, say you don’t know.
Key Strategies for Getting the Money When You Might Not be Fundable
Any of the above issues can put your deal at risk. Most of these issues can be overcome if you manage them appropriately. Hopefully, as was in my case, your gating issue is inexperience and / or a lack of depth in the space. You can counter this with a few smart moves.
First, if you are not an expert in the market you are entering, your number 1 priority is to “get smart” about the space and surround yourself with a team of people who are experts. This includes a board of advisors. Learn everything there is to know about the market and the competition. Find people who have lived it and know how to win. That’s what I did.
Second, you must communicate to prospective investors that you will never get in the way of the company’s success. Take your ego out of the equation. Never allow yourself to be the reason the company flounders. A Founder / CEO serves at the pleasure of the board, who in turn guard the interests of the shareholders (not the interests of the Founder).
In my case, whenever a VC said, “We like you Mike, but we don’t think you’re the best guy to lead the company,” I slid a piece of paper face down across the table.
It was my resignation.
“If ever you guys think I’m not doing the job, just date and countersign this and choose my successor.”
I got the money.
Third, consider the possibility that you may NOT be the right person to run your company. You might be better at product or operations. Lots of successful startup founders did not assume the CEO role. Don’t be the reason your startup doesn’t get funded.
Postscript: In my venture, the VC’s did indeed accept my pre-signed letter of resignation after one year, and installed my successor. After 10 months she ran it into the ground and they asked me to come back. Which I did (with more stock and compensation), and ran the company for 10 years. After returning as CEO, I was able to raise an additional $20M.
It’s not where you start. It’s where you finish. You’ll have a better chance of finishing with the money. If you’re not fundable, install someone who is fundable.