Over the past three months, I've met with about 50 founders who are in the early stages of building their startups. Interestingly, some patterns began to emerge.
The first group, probably more than half of the meetings, felt a lot like sales meetings. The typical agenda would go like this: brief intros, a review of the pitch deck, and a discussion about financial needs. Pitch decks generally followed a common theme: problem definition, solution, market potential (TAM), projected growth over a few years, the team, and the business's financial needs. Often, the conversation would focus on market potential and planned growth. Revenue was always projected to increase, and the absolute numbers were staggering, even just 2 or 3 years into the business. Typically, the startup being presented hadn't launched yet or was still in development.
The second group consisted of founders who had launched their product and realized that achieving traction was tougher than they had initially assumed. These meetings were less about pitch decks and more about tackling growth challenges. Typically, the conversation would shift towards issues in scaling up, what are the obstacles that users face, potential brainstorming about reasons of what should be done to change the course of the product adoption. Money matters were also discussed, but the numbers were generally smaller than those in the first group. These founders were more interested in brainstorming and questioning ideas.
The third and rarest group includes founders who built a prototype, launched it, and discovered that people want to use their product. They're now figuring out their next steps. Sometimes, these prototypes were built while the founders were working their day jobs, leading to the dilemma of whether to quit and focus on the startup full time. Other times, the founders have already devoted their time to the startup, but it's clear that they need more help. Most individuals in this group are working on a startup for the first time. They typically lack experience in running a business, and this lack of business acumen might be stressful for them. While it's clear that the product is far from perfect and that the tasks ahead outnumber what has already been accomplished, these founders feel they're onto something. However, given the overwhelming number of tasks, their mindset is mainly focused on completing critical projects "now" rather than on long-term plans. Pitch decks are rarely present in these discussions.
Of course, it's not possible to fit every startup into one of the categories above, and that's not my intention. I simply find these observations interesting.
The logical next question is, which type of startup is most likely to secure an investment?
To answer this, it's crucial to understand what drives the investment decisions of an early-stage investor, and arguably most, if not all, investors.
First and foremost, people invest money to make more money. It's as pure and simple as that. It might not be the most romantic notion, but it's the basic premise of investing. In investing, understanding risk is key to survival. Investors strive to fully comprehend the potential risk and reward of their investments, and based on this, make a go or no-go decision.
So, in the very early stages of building a startup, what aspects can make investors feel confident, lower their perceived investment risk, and increase their anticipated reward?
One might assume that presenting a robust and detailed forecast, coupled with a promising Total Addressable Market, should do the trick. But I don't believe that's necessarily the case. Maybe it's possible to construct a flawless growth forecast for the next few years, but I haven't seen one yet, particularly if the product hasn't been launched. Even large companies, with hundreds of employees and departments focused solely on sales, often miss their forecasts. Just recently, NVIDIA increased their forecast by 50% for the upcoming quarter! That's great for NVIDIA, but it also shows how difficult it can be to provide an accurate forecast, even for the next few months. So, how likely is it that a company, which hasn't even started yet, can provide a forecast for the next three years?!
Another common misconception is that a detailed long-term plan outlining sequential steps is desirable. I believe there are actually very few steps that need to be taken - namely launching the initial version of the product and iterating with customers. I wrote more about that in the post on how to start a startup. No plan can outdo an approach like that. Typically, after launching the MVP (Minimum Viable Product), reality sets in and it becomes pretty clear what needs to be done next, or at least what should not be continued.
So, what does inspire confidence?
In an ideal world, a working MVP with initial traction is perfect. Obviously, early traction doesn't guarantee success, but it does validate a few things, as a result reducing risk:
The founders are operators who can build and launch a product.
There's early validation of the product's need.
Customer feedback is driving decision-making.
The founders have a real stake in the game and are committed to running the business.
In a situation like this, I immediately start considering the potential upside. What is really possible? How can the team achieve this? Market size typically comes up here, but the conversation leans more towards the number of potential future customers - who they are and how to reach them - rather than the Total Addressable Market (TAM) figure. A meeting with the founders resembles more of a brainstorming session, with everyone engaged, potential next steps being discussed. Founders are curious; they really want to get feedback on their ideas. After meetings like these, I immediately start to study the space and think about the feedback. To some extent, I want to show founders that I can help them build a business, and that my involvement isn't limited to providing capital.
In other situations, founders need to raise capital to launch the first version of their product. In circumstances like this, the risk of an investment typically increases since more factors need to be validated; therefore, investor confidence naturally decreases. However, getting an investment is still possible. So, what's crucial?
First and foremost is the founders' profound understanding of the market and customer needs. Founders must be experts in their fields. They often share personal stories explaining why they believe the problem they're tackling is worth solving. Their reasoning extends beyond their observations. They know other people who experience the same problem and are aware of the shortcomings of the solutions these people use. Their passion for the subject is evident. They feel uncomfortable with current solutions and there is an urge to change that.
Secondly, even without a launched product, founders may have engaged in other activities that validate their idea, such as running a blog, a YouTube channel, or a Facebook page. Gathering an initial group of potential users around relevant content strongly indicates that the founders are capable of building a product. This is supported by two main reasons:
Engagement with the content validates its relevance.
Successfully managing a YouTube channel or a Facebook page provides initial validation of the founders' execution capabilities.
During conversations like these, I learn a lot about the field. The insights are far from obvious.
In both scenarios I've described above, I always strive to understand the rationale behind starting a company. The best reasons are tied to the founders' dissatisfaction with the current situation or existing solutions. It's clear to them that things could be approached differently, and it's a matter of time before someone does so.
Last but not least, early-stage investing is also about the thrill that comes with the opportunity. At the end of the day, for me to invest, I need to feel excited about the project, the people, and the sector.
It’s somewhat similar to accepting a new job. While factors like money, position, and industry are important, ultimately, the excitement about the opportunity also plays a significant role.
As a founder seeking early-stage investment, you might view it similarly to hiring your first employee. What are the things that would excite them? Why would they choose your startup over all other options they might have? How would you persuade them? How would you convince them to join?
I’m open to invest and/or help your startup grow. If you have any questions or thoughts don’t hesitate to reach out at bart@founderspond.com or DM me at @kiszal on Twitter.