Are you investor ready?

investor

Today is the deadline for applications to MIT’s Demo Day to be held in April. Demo Day gives selected Venture Mentoring Service founders five minutes to pitch to the audience of VCs and angels.

I work almost exclusively with raw startups, whether at MIT VMS, The MIT Sandbox Fund or the MIT Post-Doc Association. Very, very few founders want to rely on bootstrapping, the vast majority have “how do I raise money?” on their agendas early in the mentoring process.

But what I find is that few new founders understand what it means to be investor ready. Here’s a snapshot of what is needed before you decide to apply for investor pitches:

  • Team – most investors I’ve known focus on the team first. And in fact of the team, 90% of the focus is often on the CEO. Does she or he have what it takes to drive a company to a $100 million sales run rate? Or will the investors need to replace the founder with a seasoned veteran as the founder either can’t handle running a company with several hundred employees, or is often the case, is not really interested in doing so. They prefer to build things, as most founders tend to be engineers and engineers build stuff. So you need a CEO who presents well: confident, articulate, and passionate about the business, with a vision for how they will disrupt an existing market or create a new one. While investors don’t expect raw startups to have full teams, it’s tough being a singleton. At minimum you need a partner who complements, not duplicates, the founder’s skill set. Too often I see two engineers, a CEO and a COO – both are makers, not sellers. While it’s usually too soon to attract a proven sales person, early stage startups have to show that the founders can sell. We used to call that “executive sales.” Even when a startup hires sales staff often customers or clients need to be closed by the CEO – they want to know who is running the company they are betting on.  A good two-some is an engineer and an experienced digital marketer. A three-some might add someone with business development experience – building partnerships that turn into channel sales.  Teams whose members know each other previously and/or have worked together tend to be more successful than strangers brought together through networking events.
  • Product – investors want an unfair advantage, as one veteran VC told me. What’s your unfair advantage? These days with so many AI startups that advantage may be an algorithm or patent pending technology.  Secret sauce is hard to manufacture. But differentiation isn’t. How are you different than other products or services targeting the same customer? What is your sustainable competitive advantage? What is remarkable about your venture? The downside of today’s entrepreneurial explosion is that there may be a raft of competitors, no matter what niche you choose. And first mover advantage is not always that. But if you can’t demonstrate – show, don’t tell – a clearcut differentiator that will appeal to customers don’t bother apply to demo days. The stage of your product is also vitally important. The best is that you’ve launched and you not only have traction, but you have viral growth. That’s pretty exceptional and but a few very smart MIT founders have even raised money with just a prototype. But the further along the product lifecycle you are and the closer you are to building a customer base, the better.
  • Market opportunity – far too many founders want to boil the ocean. If you suggest they target a niche to start off they get visibly anxious that they will be leaving millions of customers behind. Quite the contrary, if you can dominate a niche you can then move into adjacent markets. Facebook’s classic rollout started with Harvard, then other Ivy League schools, then other elite colleges then to anyone with a .edu email address and so on. Mark Zuckerberg was careful not to make the mistake Friendster made of having so much demand their servers failed repeatedly. VCs want billion dollar markets and your market needs to be growing, not static nor shrinking. The better you can explain your market dynamics and how your solution will win against competitors or whatever customers are getting by with, the better.

VCs are all about managing and reducing risk, contrary to their popular image as swash buckling risk takers. There are three types of risks: management, technology, and market. To be investor ready you should be able to convince investors that you have significantly reduced risk in all three areas.

There’s one other intangible to being investor ready: capturing investors’ imaginations. While these Ivy League MBA-wielding financial managers pretend to be data-driven, they really go with their gut (and often what their kids say about consumer apps) and then justify their decision to their partners with the numbers. I have found one key way to know that you have captured an investor’s imagination: when they start telling you what new markets your product could conquer. A truly excited investor buys into the vision and will demonstrate that by throwing out ideas on how you can make you product even more successful instead of their default mode of strafing the poor founder with a fusillade of reasons why their venture will never work.

So run through the big three – team, product, and market opportunity – and if you think you have critical mass in all three areas go for it, otherwise get back to work. Don’t worry, investors will always to be out there and interested in a world-class team with a breakthrough product, solving a big problem for millions of customers.

Author: Mentorphile

Mentor, coach, and advisor to entrepreneurs, small businesses, and non-profit organizations. General manager with significant experience in both for-profit and non-profit organizations. Focus on media and information. On founding team of four venture-backed companies. Currently Chairman of Popsleuth, Inc., maker of the Endorfyn app for keeping fans updated on new stuff from their favorite artists.

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