Over the years when I was Program Manager for one of Florida’s premier angel investor groups, I came in contact with well over two hundred startups. These encounters spanned a continuous spectrum which went from meeting a founder entrepreneur in a networking event who briefed me on his or her venture, to sitting down for a couple of hours with the management team of an early stage company for a previously scheduled session. Two common threads ran parallel along all the companies and the stories, and the people behind them that crossed my path: 1) The entrepreneurial spirit, or the yearning of people to chart their own course – to call their shots – was very much alive and well in the South Florida entrepreneurial ecosystem and 2) All of these entrepreneurs were aggressively looking for funding, and had a strong belief in their own company’s capacity to bring a very attractive return to an outside investor.
As Director of the Innovation Hub at Broward College, and witnessing a year and a half of quality throughput in our Startup NOW Accelerator, I am drawn to the same conclusion I arrived at while managing the pipeline at the angel investor group: Everybody wants a spot at the risk capital audition stage.
I have been fortunate to have a front row seat at this audition stage where only in a small percentage of occasions and after a very rigorous selection process, smart, experienced, “seasoned” capital is put to work in an early stage company. So, what’s the formula that reconciles the favorable optimism of the entrepreneur presenting his or her company with the experience and the risk management analysis of the investor? Are there subjective and objective forces in play on both sides? You bet there are. If you are a founder entrepreneur, you have a lot of competition out there, so before you make the angel investor rounds, make sure you are truly ready to successfully pitch your company.
Investors know you will tend to have a positive bias towards your company and your idea. This bias permeates all your calculations and forecasts. So they will look for objective measures of the probability of success of your business. The first one of these has to do with your target market. First, you must be able to clearly define what your target market is, and you must be able to quantify it objectively. The larger the size of your target market, the better your chances of building a sizeable business, even with your bias factored in. Sizeable markets that you can realistically serve with your product or service will lower the risk as perceived by investors that a competitor playing in the same market would pose to your company.
A second most important measure investors will look for is your market readiness. Products or services start as ideas, that become prototypes, that are used in a proof of concept test, that become an actual product or a service, that become a product or a service that somebody has actually paid money for. Then, as time goes by and you can successfully get more people to pay for your product or service, you have developed customer traction. The closer you are to the end of the market readiness spectrum I just described, the more palatable you will be to an investor.
A third most important measure, as important as the other two, is the entrepreneur / founder and his or her team. Are there industry experts in your team that can be objectively perceived as such? Investors have seen their share of self- proclaimed experts without a solid track record of achievement in their area of expertise. More than experts, are there industry veterans in your team that have already been there and done that? The more evidence there is that your team has a combination of these types of people in it; the more attractive the startup will be to potential investors.
Aside from these three measures, there are other very important parameters that an investor will look at, as you would expect. These include things like competition, strong position via intellectual property, first mover or technological advantage, capital requirements, level of capital commitment from the founders and potential exit opportunities. But generally, these things are easier to sort out objectively than the first three. You could have the most advanced patented technology to address a $500 million dollar market, but if you do not have the team that can successfully grab an important share of this market as customers for your company, smart, seasoned investors will not be as interested. Yes, they could probably help you put this team together, but that is more work than they might be willing to go through if they at the same time are looking at another deal with great technology, a market as big as yours and a star team in place.
So the bottom line is, as a founder entrepreneur, you are not alone in the market for risk capital. Before you get the funding you are seeking to aggressively compete in the market for your product or service, you will be competing among fellow entrepreneurs to pique the interest of investors. The more seasoned and well-connected these investors are, the better the chance that they will help make you successful, but the more competition you will face for their investment. Being able to specifically understand and describe your target market, your readiness to address it with a finished and tested product or service and an accomplished management team that has a proven track record will increase your chances of success in the funding audition stage.