“No offense, but VCs are overrated.” I listened quietly as an entrepreneur who’d recently closed a round of funding voiced his frustration. “One day they’re investing in your business model, and the next day, they want to fundamentally alter it.” It’s nothing I hadn’t heard before – skepticism of their venture campitalist’s (VC) motives, claiming they seemed far more aligned with their own interests rather than their investees’ interests.
Time and again, VCs and entrepreneurs fail to see eye to eye. Having worked on both the entrepreneurial as well as the VC side of the startup ecosystem, I’ve found that the way each operates – or more accurately, –– to be at odds. However, being able to shift between these two ways of thinking about a business is incredibly important in assessing its viability. Ultimately, being able to take a step back to“think like an investor” can result in being a game changer for any early-stage entrepreneur.
By developing an investor’s mindset, entrepreneurs benefit in three pivotal ways:
- Entrepreneurs gain a comprehensive understanding of the startup ecosystem, complementing their laser-focused approach to building their product or service with a bird’s eye view of the market’s influence on business success.
- Entrepreneurs are better poised to manage their relationship with their potential investors and set balanced expectations.
- Entrepreneurs become well-versed in their startup’s investability potential, learning how to build a more sustainable business and how to effectively pitch their business to potential investors.
It is to question, “what dominating trends is the world likely to see in the next 5-20 years and which companies are likely to spur those trends?”. It is the goal of an investor to identify and capitalize on companies that will impact the fabric of society in the coming decades. To think like an investor is to recognize that although a good investor’s responsibility is to find the right balance between their interests and their entrepreneurs’ interests, that is not their main priority. An investor’s utmost priority is to make a significant return on their investment. It isn’t personal; it’s business. Remember: Like entrepreneurs, VCs need to stay afloat as well.
Big Picture VS Laser-Focused Thinking
In GALI’s 2016 report Accelerating Startups in Emerging Economies, investors were asked about instances where founding teams have great ideas but problems with execution – over 50% of the emerging market investors pointed to a lack of entrepreneurial experience. As one emerging market investor succinctly expressed, “we often see great technical ability, but significantly lower entrepreneurial ability.”In other words, early-stage entrepreneurs think in terms of problem-solution fit while VCs prioritize product-market fit.
As an entrepreneur, you may ask, “why is it beneficial for me to look at my company from an investor’s lens?”. Let’s be clear – neither view is better than the other. In fact, both views are imperative to building a successful business. One of our lead venture partners, Daniel Kranzler, likes to keep his definition of a business very simple: “an organization that brings in more money than it puts out.” It seems common sense, but all too often we see entrepreneurs become too engrossed in building their technology that they forget to build their business in a sustainable and viable manner. Broadening one’s focus from product to understanding how to capitalize one’s market opportunity, i.e. thinking like an investor, is essential to building an investable business.
Navigating Investor Relations
In addition to improving an entrepreneur’s understanding of the startup ecosystem, thinking like an investor can significantly help an entrepreneur manage their relationship with potential investors.
If I had a nickel for every time we’ve received a pitch deck misaligned with our investment thesis…well, you get the gist.
First and foremost, pause before you send your pitch deck to just any investor. Take time to analyze your financials and develop a clear and concise funding request that’s validated by your financial model and future projections. Next, research different types of funding. VC funding is rarely the only option! Getting the right type of funding is as important to a startup’s success as how much funding they receive. Alternative funding sources such as loans, grants, crowdfunding, fellowships, etc. may better suit your growth ambitions, especially if you’re unwilling to sacrifice equity or take on debt.
If you’re resolute on seeking VC funding, however, make sure to do the following:
Get to know your VC, study their investment thesis and the metrics they use to gauge investability. At Unitus Seed Fund, we look to invest in companies that impact India’s base of the pyramid (BoP) through education, healthcare, or financial technology. If you’re, let’s say, a company focused on developing affordable air filters, you wouldn’t necessarily be a good fit for us unless you were able to prove your model impacted the BoP in a significant way.
DON’T email dozens of VCs your pitch deck and hope for one to stick.
It’s a waste of your time and theirs. Study your VC’s portfolio, tailor your pitch deck to individual investors and reach out to VCs with investment theses aligned with your offering.
Let’s say you receive a response from a VC interested in your pitch deck. What’s next and how do you prepare?What most budding entrepreneurs don’t understand is that investors are responsible to their LPs (Limited Partners) for generating returns on investments. Being familiar not only with the VC’s investment thesis but also their LPs’ interests will go a long way in helping you engage with your VC.
At the core of thinking like an investor is a deep understanding of startup investability. Investability is something that must be gauged by both entrepreneurs and investors. Typically, most companies don’t even reach break-even from overhead costs until after their fifth year, and that’s if they’re lucky. When 90% of startups on average fail, entrepreneurs need to determine whether their business idea is worth pursuing despite the high likelihood of obstacles.
On the other hand, investors gauge investability in a far more calculated way. At Unitus Seed Fund, we examine several “critical success factors” to determine whether to invest in a startup. Critical Success Factors (CSFs) are key metrics that investors use to determine a startup’s performance and business potential. Ultimately, investability boils down to whether a startup can prove that they have a viable business opportunity, market potential, and execution capability. At Unitus Seed Fund, we break these down into the following CSFs:
These 15 CSFs guide our investment decisions and act as a framework for mentoring our investees. Like investors, entrepreneurs too need to understand this approach and how to leverage this framework as a guide to building their own businesses.
Over the past few years, we’ve been exploring ways in which the startup ecosystem could best support entrepreneurs in building more sustainable, investable businesses. While we’ve identified incubators as key players to fostering entrepreneurship in the startup ecosystem, we’ve realized they have very limited access to support. This is why we, in collaboration with veteran entrepreneurs with over 40 years of business development, investing, and incubation/acceleration experience, have built VentureBasecamp. VentureBasecamp is an entrepreneurial training program that upskills incubators in how to most effectively support entrepreneurs in building sustainable, investable businesses.
Our vision is simple: transform access to top quality entrepreneurial training to increase one’s ability to build more efficient systems of entrepreneurial support and, ultimately, more viable businesses.
At Unitus Seed Fund, we understand that strong ecosystems beget strong entrepreneurs. Hence, it’s built in our business to support both startups as well as the ecosystem at large.“Thinking like an investor” is just one of the many lessons we’ve encountered to be largely lacking in India’s startup ecosystem and in emerging markets worldwide. With VentureBasecamp, we hope to partner with incubators worldwide to more effectively train entrepreneurs on the critical success factors necessary to building successful businesses. We know building a startup is hard and navigating relationships with investors is no cake walk either.