Welcome to a BetaKit weekly series designed to help startups and entrepreneurs. Each week, investors tackle the tough questions facing founders today. Have a question you would like answered? Tweet them with the #askaninvestor hashtag, or email them here.
“Good day, as a neophyte entrepreneur attempting to build a first enterprise, what are some ways I can boost investors’ confidence? I have been preparing myself in every way possible as an aspiring entrepreneur except having started one. I am starting out now.”
– Submitted to Ask an Investor
At the most fundamental level, capital markets are premised on pricing risk. When raising private capital from VCs, the key risks that you’re being evaluated against vary based on the stage of your venture. Investors evaluate your progress of de-risking the business against multiple business areas: founding team, product, technical, ability to launch, market adoption, revenue growth, cost of sales, customer upsells, virality and engagement, competitive displacement, fundraising risk, and many more.
At the earliest stage, a founder has an idea and little more, leaving all the risks on the table. This is why the first capital into a company is traditionally from the founders themselves, an incubator or accelerator, or friends and family. At this stage, founding team risk is first and foremost, especially for a self-identified neophyte entrepreneur like yourself. There is truth to your assumption that repeat founders benefit from increased investor confidence. This is one of the key drivers for founders skipping the friends and family/pre-seed funding stage, or raising at high valuations – one of the first early risks has been mitigated and the founder is able to command a premium – whether in dollars invested, valuation or both – because of this.
Capital markets are premised on pricing risk. At the earliest stage, a founder has an idea and little more, leaving all the risks on the table.
Repeat founders are meaningfully de-risking many aspects of the business. From a management perspective, they have a clear track record and it’s easy for investors to reference check their ability to grow and evolve alongside the CEO role. There are numerous scenarios and decisions that reappear across businesses, and presumably, the founder has either learned the right path forward or made previous mistakes that they’ve learned from and won’t repeat. There’s also a higher chance that they’ve gone through the financing process before and have learned how to sell investors on the vision, both now and in the future (mitigating the risk that the company won’t be able to raise subsequent rounds of funding).
There are three key things I would keep in mind as you grapple with how to grow investor confidence in you in the absence of prior founding experience.
1. Take advantage of non-dilutive resources.
Government funding, pitch competitions, and incubators are a great source of capital for first-time founders. There are two key drivers here: 1) they typically ignore founding experience as an evaluative component or explicitly target first-time founders, and 2) they provide you with additional runway to build up a track record of execution success within this specific venture.
As a VC, I feel more confidence looking at a company with a six-month track record of building out product, landing pilot customers, and demonstrating early growth, and non-dilutive capital can enable those early milestones. A caveat here is that dilutive accelerators can be beneficial, so long as they’re top-tier in terms of skills learned (think Y Combinator), or customer and investor introductions (industry-specific accelerators excel here).
Related: Ask an Investor: How do I choose an incubator or accelerator?
2. Be mindful that success once doesn’t guarantee success again.
Just as there are advantages to investing in repeat founders, there are disadvantages. Second-time founders can be biased or overly methodological in identifying a problem to tackle, the CEO skill set is very stage-specific and it can be hard to recalibrate back to being a $1M in revenue CEO when your past three years have been spent as a $50M+ CEO, and valuation expectations are higher which can outprice investors (or at shift additional risk to other elements of the business).
Ultimately, startups don’t follow a playbook, and succeeding once doesn’t guarantee you’ll be able to build another category-leading business. With this in mind, be honest about your starting point with potential investors. Don’t claim founding experience that isn’t real or exaggerate smaller initiatives. Investors will diligence your background, and it shows that you either don’t have a cohesive vision of your unique skill set for the specific company you’re building now.
3. Understand the concept of founder-market fit and how it applies to you.
At iNovia, we evaluate founder-market fit by asking why the founding team is best positioned of all the people in the world to tackle this problem. It might be lessons learned from a prior startup experience, past work experience in the industry at hand, a unique passion for the opportunity, having experienced the pain point before, or simply possessing the strengths that match the core competencies of the business. Learning to assess founder-market fit is one of the least defined and most conceptual parts of venture capital – there’s no playbook to follow and it requires a healthy dose of gut instinct. But good investors will be looking beyond your resume to assess why you personally have the tenacity and grit to stay in the trenches when the going gets tough, and the intellect and insights to outwit your competitors.
As your company progresses and (assuming) you’re able to raise subsequent funding rounds, founding risk becomes much less of a concern with investors instead focusing on revenue growth, competitive displacement, and fundraising risk. Your problem, real as it is, is a short-lived one that will become much less acute as your company grows and you successfully execute.
Christian’s take:
You are likely asking this question about investor confidence because you’ve heard before that investors strongly prefer to back repeat entrepreneurs. You haven’t heard wrong. As Sarah points out, there are a lot of lessons derived from that first startup that makes subsequent company formations significantly de-risked.
That said, I’m going to go out on a limb and suggest that your thinking is flawed. Trying to optimize your growth path to build investor confidence in the future won’t get the results you likely want: a successful career as an entrepreneur.
So stop thinking about your career development in terms of investors confidence. Think about it from how do you increase the likelihood that anything you start will be successful.
The most obvious thing is to go start something. After all, every entrepreneur has their first company!
Building on that, there are a few key attributes that make for successful first-time startups that are worth thinking about.
Stop thinking about your career development in terms of investors confidence. Approach your career in terms of how you increase the likelihood that anything you start will be successful.
Founders that have deep domain experience have an edge – they know exactly how to disrupt an industry they have worked in for decades. They know all the weak points and are more than happy to exploit them all. Have you spent long enough time in the trenches of your industry to be that founder?
A corollary to deep experience is deep early startup experience: being an integral early employee of a startup. They’ve seen the playbook and know how to draft the playbook for the next startup. As you think about your career, consider joining a founder early on and learning through building a company.
Too often first-time founders fail because they don’t fully comprehend the complexity of founder dynamics. This in turns means that the team typically hasn’t sorted out the written and unwritten agreement amongst themselves. In other words, they haven’t pre-negotiated all the edge cases. Repeat founders here have a huge edge because they both have seen the edge cases as well as understand what’s important and what isn’t. (Many first-time founding teams fall apart on issues that aren’t really important – they just seem that way). This lack of experience for first-time founders can be offset by a strong founder/CEO. A strong founder that is as much a vision setter as operator can use their position and role to work through founder dynamic issues that come up. That combination of vision and action can be learned at a number of positions in the general workforce. Positions where you both manage a team and have a significant amount of autonomy. These are typically positions that have responsibility for a P&L.
Finally, founders with a significant passion for the problem they are solving have a deep edge; there is a deep connection to the opportunity they are going after and they will solve it regardless of the obstacle. Their passion has led them to go the distance to uncover all the intricacies of the business problem they are going after – very similar in results to deep domain experience. Likely I don’t even need to tell you this – you already have an issue you are deeply passionate about. Go and solve that!
I’ll close by reiterating: don’t try and solve for investor confidence. Optimize for what will make you a successful entrepreneur with a large and growing business. Fundraising and investors are just a means to an end. They should never be the goal you are trying to achieve.
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Photo courtesy Crew on Unsplash.
