Cristobal Alonso, CEO, Startup Wise Guys.
The dust is finally settling on the founders’ fantasy year of 2021, when startup funding reached levels that looked—and indeed were—unsustainable.
So far it’s not a hard landing. In fact, it’s quite possible that a new startup investment cycle is about to start. CB Insights Research reports that fintech unicorn births rebounded in Q4 2022, with 18 new unicorns added, bringing the total number of fintech unicorns to 123. If that’s a straw in the wind, then getting into the ears of VCs—which remains tough right now—is going to get easier again.
However, with caution still dominant, founders considering going into the funding market right now need to make sure they don’t set off any red flags in VCs’ minds. And there are plenty of those to choose from. The four less obvious bear traps I’m covering here have caused the implosion of many pitches.
Thinking Big
Let’s start with a big one—the failure to not think big enough. One of the goals of an investor is to find founders with the greatest vision. Some seem to be happy to penetrate certain small, and localized markets, ignoring bigger opportunities around them. The founder doesn’t seem to have the ambition and excitement for hypergrowth.
For significant success, a company should have a bold and ambitious vision that can disrupt the industry and capture a significant market share. The VCs you meet may be evaluating whether you are thinking big enough and whether your vision has the potential to create significant value for customers.
Passion and commitment to the vision are key here. Founders who are truly passionate about their vision will be more likely to persevere through the inevitable challenges and setbacks that come with building a successful company. They are more likely to inspire top talent to join their team and help them achieve their goals.
Really Listening
It’s not like investors are looking for a total plan to get to hypergrowth. There is no set-in-stone strategy to do it. Which brings us to our second red flag: founders who don’t have the ability to absorb feedback and adjust their plans accordingly.
Since there is no exact path to hypergrowth, founders should be capable of listening to and incorporating feedback into an adjusted plan. An inability to do this indicates that the founders are not prepared, organized, or realistic about their goals and milestones. Founders who lack this sort of agility may encounter unexpected challenges, delays, and costs that could jeopardize their success.
Employee Mentality
The third no-no is founders looking for funding to cover their salaries. This is an employee mindset. If you say, “We’ll do X if we get the funding,” it’s a red flag (to talk about not going full time until market salaries are secured). It may indicate that the founders are not fully committed to the business and are more interested in building a job for themselves than in creating a sustainable and scalable business. Funding should be a fuel for growth, not a founders’ compensation.
While it’s natural for founders to want to be compensated for their work (and should be able to cover their basic needs), VCs ultimately want to invest in founders who are willing to make sacrifices in order to achieve growth. If the founders are primarily interested in their own market salaries, it may be a sign that they are not the right fit for a VC investment.
One-Track Mind
The last red flag that comes up, especially in fields like deeptech, is founders who only talk about their product. You can observe this when (usually CTO/CPO-type founders) spend their entire presentation explaining the intricacies of their product (roadmap, feature, UI/UX…), ignoring go-to-market strategies and what the customer needs, and how those three things interrelate.
While having a great product is important, building a successful company requires more than that. Founders who only talk about their product may not have a holistic understanding of the market opportunity or the broader market dynamics. VCs are looking for founders who have a clear understanding of the market opportunity and a solid plan for how they will market and sell their product.
Founders also need to be able to communicate their vision and strategy effectively and convincingly to potential employees. Founders who are solely focused on their product may struggle to build a strong team, and building a successful company requires a team with a diverse set of skills and expertise. Being too inward looking might mean not being able to attract and retain the talent needed to succeed.
Can we learn to avoid tells?
Maybe you’ve noticed that these four false-steps have something in common. They are tells, to use a poker term, that the would-be founder currently lacks that certain something called entrepreneurship.
It’s not a particularly in-vogue word at the moment, something that we perhaps associate with a previous wave of business investment and founders in the ‘80s and ‘90s. But it expresses a core desire and ability to build something new and big. If it’s not there, then the scale of achievement is likely to be skinnier than most VCs are looking for.
Some people say that entrepreneurship is innate. You are either born with it or not. I disagree. Which is why I’ve taken the time to provide guidance. I believe people can develop entrepreneurship and I’ve seen—and been involved with—plenty of examples where that has happened. The skills and traits of a founder really can be studied, honed and improved. If you have the desire.
Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?
Read the full article here
