What do investors in startups really look for?
5th July 2012 · 0 Comments
Here’s a topic that has been assigned to me for a lunch ‘n learn with a summer accelerator program. There are two aspects to this question: (1) what do investors hope to achieve from a startup investment, and (2) what are they hoping to see that causes them to make the investment to begin with? I’m going to discuss the first of these in this post and follow up the second later this week.
I don’t know about your situation, but my calendar is pretty full before and after the mid-week Fourth; people are either working hard this week or they’ve already escaped town. One of my cycling mates this morning actually conducts one of the major local shows; he’s not a member of the famous Zambelli family, but he’s got the explosives and a match. If he accepts volunteer helpers, I might sign up. (“Mr. Dyer was last seen somewhere over the night sky. RIP”)
Back to business:
1. Investors want you to be successful. I’m not talking just money here, but investors genuinely want you to have a happy outcome from your venture. They’d like to see your name in lights for all the right reasons. It’s also just fun being part of a winning story, especially if their money helped launch a business or a product that achieved some level of notoriety in its market. That’s a nice story to explain to the spouse, and it travels well in the Club locker room.
2. They want the next-to-last full measure of your devotion. It does them no good if you die at your desk (as did my friend George Tate of the original dBase company Ashton-Tate), and Bob Metcalfe often talks in his class about the need for entrepreneurs to adopt habits that keep them healthy. But, short of that you are expected to give 150% of your best effort to do everything possible to achieve the company goal. That means, among many things, staying focused, being very diligent in following up every opportunity, absolutely no distracting side ventures, and assembling and taking care of a strong team. One of my favorite investors in a deal long past used to call me up occasionally. He would always say: “I have no idea what you’re doing, but as long as you answer the office phone I presume we are still in business and my money is safe.” That was his friendly way of making sure I was devoted to the cause.
3. Investors want an exit. The worst case for a startup investor is to become your partner for life while you make a living and they never get a return on their money. They’re looking for you to create something of value that will cause a buyer to grace them with a multiple on their money, or to throw off cash that after a while has fully repaid their original bait plus a decent return and has the effect of an exit. One local Austin company I know is a great example of the latter; the entrepreneur structured his investment rounds along the way so that now his ten-year “overnight success” has in fact long ago returned all the capital at risk and continues to provide healthy annuities for its investors. People relish opening envelopes with dividend checks; those are certainly easy to explain at home.
4. Investors want updates. They’re much happier and enjoy more “psychic income” if they get the inside story from day one and continue to be kept informed. You don’t have something they can check in their brokerage accounts at will; they are dependent on you to provide some continuing data, good or bad, so they have some concept of how things are progressing. Total surprises are not good – not that there won’t be lots of daily surprises over the years, or that you’ll hit all the numbers spot on, but just allow your investors always to have a general notion of the state of the business.
5. They want to help. Yes, some may want to help too much, and entrepreneurs have varying degrees of receptiveness to help, particularly in highly technical businesses where the investors may not have any real knowledge of the domain. But, by and large, there will come times when one of your investors finds the opportunity to add some value far beyond the dollars at risk. It may be sage advice on a particular situation, or it may be a warm introduction you need. By all means, listen. You may choose to ignore a string of bad ideas, but then suddenly there will be a jewel that does make a difference. Keeping the communication lines open both ways can pay off.
6. Investors want to know you’re interested in them. This is just common courtesy, but keep yourself informed as to the business and personal doings of your investors. This doesn’t mean you have to attend all their family weddings and bar mitzvah’s, but just asking enough questions when appropriate to demonstrate that you know you are dealing with people and not just checkbooks can go a long way toward cementing a relationship. An entrepreneur friend in Atlanta often said that his only long-term asset was his investor base that enabled him to keep playing the game. Take care of that asset with the importance it deserves.
<photo from Zambelli site gallery>