By Cameron Chell
CEO, Podium Ventures
Tech startups are currently a media fixation. From newsrooms to broadcast booths they’re everywhere and spawning a lot of interest from investors on every corner of the map. While it’s exciting to partake in a small amount of animated prophesizing of an investments’ acquisition potential, investors, especially those new to the industry, will do well to keep at least one foot on the ground and not get too swept up in the latest Wired article.
As with any investment, startups are commonly about being sold the sizzle and not the steak and so, for investors, being able to see beyond the hype to the real story can be the difference between backing a winner and falling at the first fence.
Know The Game Board
People typically refer to startup investing as a game and, as with any game, fully understanding the rules, objectives and tactics, affords a player a far better chance of success.
Many startups set out to change the world in one way or another. This is often a primary motivator for entrepreneurs and provides the passion and tenacity to get drive business forward. Passion and tenacity alone, however, don’t a success make. When startups, and especially founders, remain naïve to all the potential complexities and varying dynamics of the industry they’re preparing to enter, it can be a red flag.
As an investor, it’s imperative to understand the ecosystem for yourself. When you know the potential for market growth (or lack of), understand the position of existing competitors and whether proposed revenue streams are likely to be achievable, you can make a far more educated evaluation of the opportunity.
Understand The Team
There’s no one magical human being with a wide enough skillset to get a revolutionary product from inception to market. Teams accomplish this. As with the lead singer in a rock band however, media coverage of a startup tends to focus solely on the CEO. For the most part, this seems fair enough. They’re commonly a company founder and have therefore always been the face of the organization. As an investor though, you need to pull back the media layer and look beneath.
Teams that have been there and done it before are often the ones that understand the ins and outs of the marketplace. They knew what to look for in competitors, who is new to the scene, and where the best market fit will be. It’s not to say that fresh faces are a negative, in fact it’s quite the opposite. What investors should look for is a blend. You want the experience of those who have been there, together with the tenacity of the new faces who may not be objective, but are very creative. That blend breeds success.
Know The Scope
Trying to do everything at once is almost a guaranteed recipe for disaster. While trying to accomplish everything, startups typically accomplish nothing. Knowing the scope is about examining the startup and their path to success. Doing that means breaking progress down into three early stages of measurement.
Having lots of people like what a startup does isn’t enough anymore. Startups must focus on revenue early and this will include a logical path to it. This first stage is about creating a customer fit hypothesis, something investors need to be keenly aware of. How does a startup plan to gain users of their product or service and when those users offer feedback on their experience, how will that information be used to evolve the product? If a startup doesn’t know the answers to these questions, how can they build a product customers will use?
In the second stage, customer acquisition needs to be a focus. Startups need to direct their product development towards the conclusions they’ve drawn from their customers. From this position, investors should be looking for the first stages of revenue to begin trickling in. That revenue is the ultimate validation of an initial hypothesis.
In the third stage, investors should be looking for a scaling pathway; what margins is a startup working with, are there economies of scale as growth continues, etc. Following these three stages closely is important for investors because it shows the startup has their feet planted and is operating as a business should – with the clear objective of being profitable.
Keep The Egos In Check
One of the most overlooked aspects of investing in startups is that you aren’t investing in an idea, but the team behind it. The number one killer of startups is egos that have no system of checks and balances.
Entrepreneurs are a passionate group and, more often than not, their passion and identity is linked directly to their company. In this situation, it’s hard to detach the company from the person and entrepreneurs can close themselves off completely from receiving constructive feedback. For investors it’s always worth keeping in mind that egos sink startups. A successful startup is about the team involved, not simply the passionate ideas a leader brings.