As we have seen in the introduction, Investors seek much higher returns for their investments in startups. They understand that their gains via exits are dependent on the next round of investments which in turn is contingent on visible performance by the startup.
While the idea is the seed for the business, Investors give more credence to execution than the idea itself and they rely on the Founder(s) to take the idea forward. They also know that the initial idea may get revised and sometimes the Founders will work on a totally different idea given the market feedback. Hence Investors place a premium on the Founders more than anything else in their initial assessment.
In short, Investors bet on the Founders than anything else.
What are the specific attributes of the Founders that Investors expect?
More importantly, ‘what do you need to do as a Founder to relate to those expectations’ is suggested in italics at the end of each attribute.
Let’s start, shall we?
- High level of passion of the Founders for the business. Investors look for and believe that passionate founders can make a huge difference and can recognize teams that are visibly passionate. As Founders, you need to display that passion for your idea and business by showing the investors the various experiments you have done, the multiple obstacles you have surmounted in the journey so far and your willingness to walk the entire way through, with or without the investments. If there is any personal dimension to your idea, like a family member or a near one who would have benefited if this product/service was available, then make sure you highlight that.
- Founders working full-time on the business. Someone who is working on a job while trying to pursue an entrepreneurial venture is a red flag for most, if not all, investors. It gives the perception that the Founder is not sure about the prospects of his proposed business and is trying to hedge the bets by keeping his job. Investors expect and demand total commitment of the Founders towards their business and hence would turn away any proposal where the Founders are in it part-time. If you are full-time, state it but if you are a Founder still keeping your job while pitching to Investors, you can still handle that negative perception by announcing a near future date by when you will be full-time.
- Founders drawing little or no salary from the business. This is seen as yet another mode of commitment of the Founders to the business like 2 above. While the Founders may have worked in key positions with large corporations earlier and earning sizable salaries, they cannot continue to do so in their fledgling venture. Investors are wary of Founders who use the capital to fund their existing lifestyle as that would reduce the amount available for growing the business, building the product or the team. So if a Founder is taking no salary in the initial phase, it is seen as a positive factor. Some investors even insist on a cap on the founder salaries when they invest. Respect their concern and if you are taking little or no salary, state it to your advantage. If it is quite substantial, either commit to reducing it in a phased manner or show revenue streams that would make it affordable.
- Founders’ relevance for the business. This is not exactly a must-have like the points 1 & 2, but if the Founders come from the same industry where they want to introduce their product/service, it is normally given an additional weightage compared to some other teams where the Founder(s) do not have any domain knowledge or experience. And where there is a heavy technological aspect to the business like say AI , Investors look for sound Founder(s) who have worked in cutting edge technologies in AI or have a Masters (if not PhD) in AI from a very reputed institution. Further, the experience of the Founders will help them in problem identification, positioning the offering etc especially if it is a B2B (Business To Business) offering. But given that there have been very successful entrepreneurs who did not have any domain experience or background, Investors do not insist on prior experience in the field as a pre-requisite. If you have relevant experience or qualification, highlight it in your pitch. If not, show how you have done more than enough research and have gained relevant insights or that you have an Advisor who is a heavyweight in that industry, on board.
- Working as a Team. While there have been instances where Investors have said yes to single founder ventures, they are far and few between. Investors prefer to fund ventures led by a team of Founders on two grounds. One is risk mitigation wherein the venture will not get adversely affected if one of the founders leaves or is incapacitated. The second reason is that 2 heads are better than one and 4 hands are better than 2. Investors appreciate prior collaboration or relationship between the founders either as colleagues, friends or better still, co founders in an earlier venture. Teams where the Founders bring in complementary skills are also favourably regarded by Investors. Don’t assume that Investors will be able to see the strength of your team. State it in a very strong manner in your pitch and be prepared to defend it if questioned.
- Pedigree of the Founders. It is a common gripe that ventures founded by alumni of IIT/IIMs are favourably looked upon by Investors compared to others. There might be an element of truth in this and many Investors believe that these founders have a better IQ and with their network would be able to put together a good team and also gain entry into customer organizations. But let’s not restrict pedigree only to academic aspect alone. Entrepreneurs who have built and sold businesses earlier enjoy a higher than normal preference when they approach investors for their subsequent ventures. Even failed entrepreneurs are seen as better than first time founders because Investors believe that they would have learnt significant lessons from their failures and this would help them succeed in their current venture. Each one of you have something you are proud of and you must highlight that in a way to catch their attention and lead the conversation. Do not be defensive about your background at all.
- Willingness of the Founders to take feedback. By virtue of their earlier investments, Investors know that the market gives rude shocks to entrepreneurs and hence only those who are able to absorb the response and make course corrections have a chance to succeed. Founders who resent criticism are generally avoided as their stubborness may be their undoing. If you want to demonstrate this ability, listen to questions or objections from the Investors without interrupting, restate their concerns in your own words to show that you have understood and then respond with confidence. If you have made a mistake, admit it. Do not argue even if the Investor has got it wrong.
- Founders ability to bounce back. Any demonstrated ability on the part of the Founders to actually snatch victory from the jaws of defeat will be a huge plus as Investors believe that the entrepreneurial journey is fraught with risks at every juncture. Founders may do well to show examples of their having come back from the brink of disaster. If there are instances in your career or life where you were faced with a hostile situation and yet you emerged triumphant, share it with the investors in no unambiguous terms.
- Founders varied experience. If the Founders have worked in different markets or different roles with marquee companies, they are usually given a thumbs up compared to someone who has been in the same role all along. Investors know that Founders have to multi-task and wear many hats and hence this would be an obvious advantage. If you have done a stint in customer care in addition to technology development, for example, you can use that to show how well-rounded you are and how that listening will help you in this new venture.
- Clarity and coherence of communication. Investors don’t expect Founders to be orators but certainly look for strong communicators. The ability of the Founders to maintain a coherent thread and lead the conversation in a clear concise manner are clear strengths that Investors value. They also like a display of a quiet confidence when Founders speak or interact. Being well-prepared is essential for clarity and hence do many mock ups with other founders or friends to become ready to face the investors.
- Display of balance. Investors consider Founders who are balanced personalities. If there is a Founder who is obsessed with say technology but doesn’t bother about the customer, that is an early warning signal unless there is a co-founder who can manage that lopsided behaviour. If you believe you are a balanced person, give examples from your career or life. If you have ever been part of task forces or led even small teams, recall that to highlight your balance.
- Ability to think-through. Investors would be looking for a shared vision amongst the Founders on the business and would pose questions to understand whether you have thought of possible scenarios and situations that may actually deter you from going all the way. I strongly suggest that Founders do a detailed SWOT Analysis (Strengths, Weaknesses, Opportunities, Threats) of themselves as well as their business venture and this will help them be adequately prepared to answer ‘what-if’ questions from the Investors.
Well, that’s quite a handful, isn’t it?
Looking forward to hearing from you on specific points you liked and also anything that I missed out. Please use the comments to share your thoughts for the benefit of others.
If you want to have an objective assessment of the Founders and/or position the Team as to make a positive impact on Investors, feel free to reach out to us