This is the last article in the series….I promise! If you were gracious enough to follow along, we covered the five dimensions most startups are evaluated on by investors:
To wrap it up, I wanted to touch on Alignment and Timing – two variables that influence whether or not a startup has a decent shot at getting funded after the five dimensions are evaluated by investors. And if funded, a reasonable chance of being successful.
After completing their due diligence, how the five dimensions are aligned (or not) in the eyes of investors will largely determine if they will be interested in investing. The underlining criteria in each of the five dimensions are evaluated differently by different types of investors. How those investors rate and assess the criteria and their alignment with each other (in their system of evaluation), will determine if they extend a term sheet.
You probably surmised by now that Five Star Startups are a rarity – very few come along each year. Every startup has flaws. Most flaws, however, are not fatal. Savvy investors know most things are fixable – and some have made a killing by helping to shore up the weaknesses and align their portfolio companies for success.
- The product can always be improved.
- A company can pivot to a more lucrative, underserved market.
- Exceptional people can be added to the team.
- Brilliant strategies can be devised, tested and executed.
- The revenue model can be perfected and the financing terms negotiated for a win-win by investors and the team.
But just because these things are fixable does not mean the company is fundable. It depends on what dimensions are out of alignment and what it will take in time/money/talent to align them for success.
Consider these three scenarios:
The IDEAL (very rare) Deal
If the underlining criteria in each of the five dimensions ranks high after due diligence, the startup is a great bet and will attract investors like bees to honey. The stars are fairly well aligned. The deal will be oversubscribed, the founders can pick and choose their investors. The risks to investors are manageable. These deals are rare.
The Fundable (more common) Deal
If the underlining criteria in product and strategy are sub-par following due diligence, the deal is still fundable as long as the market opportunity and team rank high. A good team can fix product. Smart investors can help fix strategy. And, of course, if the economics are strong, there will be enough investors willing to take the risk. These are the most common types of deals invested in by both VC’s and angels.
The UNFUNDABLE (typically rejected) Deal
If the underlining criteria in market and economics are sub-par following due diligence, the deal has almost zero chance of getting funded. This is especially true if the team is average (usually young and inexperienced) and the economics don’t make sense. Every investor (including myself) see these types of deals EVERYDAY. The product is usually awesome, but there is no defined market for it and/or no clear idea of how the company will make money. The risks are too high for most investors to want to help fix these problems – there are better deals to chase.
Upon concluding due diligence and assessing the rating and alignment of the five dimensions, smart investors will give serious consideration to TIMING. It’s a super hard variable to evaluate, but plays a critical role in a startup’s likelihood of success. As Victor Hugo famously said, “Nothing is more powerful than an idea whose time has come.”
If you get the timing right – and the five dimensions can be brought into alignment with a moderate degree of risk – you are golden. Bill Gross fromIdeaLab recently gave a great TED Talk: The Single Biggest Reason Why Startups Succeed
You guessed it, his findings found that TIMING was the biggest reason. In my humble experience, having founded seven companies and been involved as an investor or advisor in dozens of others, I agree wholeheartedly with his conclusion. In my small world as a startup founder/investor/advisor, being early and scaling prematurely has been the single biggest cause of failure. In hindsight, the task at hand was practically insurmountable, no matter how much money and talent we threw at it… no matter how passionate, how committed, or how hard the team worked.
That’s a critically important (and expensive) lesson for all startup founders and investors! It begs the need for more posts on the subject of startup timing: how to recognize it, and what to do if you are too early or a tad too late. I’ll try to take up this subject in future posts and would love the benefit of your insights and examples. You can send me your thoughts at firstname.lastname@example.org.
Thanks a bunch for staying with me through this series and to those of you who contributed your thoughts. Whether you are an entrepreneur, investor, or member of a startup team, I hope you found this series useful. For all of their challenges and risks, startups are still the best source of new innovations, new jobs, and new wealth. May more of your startups be FIVE STAR. Cheers!