A successful early-stage investment in digital start-ups and early-stage businesses is 90 per cent predicated on the quality of the founder and the founding team and the behaviour they exhibit, whether in the screening process, at the showcase, during the due diligence, negotiation, disbursement and post-investment. The other 10 per cent is doing proper due diligence on the company itself, how they structure the deal and the work done post-deal but at this stage in the cycle of a business, the investor is betting on the founder(s). The quality of their character, experience base and skill sets is far more important than any business strategy, pitch deck, app, data room or financial model.
With the benefit of hindsight, and interviews with a number of entrepreneurs over the past year, here are a few red flags that communicate that a startup founder is not ready to take on outside investors.
Lack of basic data
It is surprising when an entrepreneur "needs to get back" about last month's revenues, or basic KPIs such as average basket size, conversion rates, lead time, customer acquisition cost, month-over-month growth rate, retention rates, etc. Many struggle when asked, point blank, what their goals are for 12-18 months and how much money they need to accomplish them. They do not have a defined target segment and demographics and spending data and purchase/consumption behaviour. They cannot tell in detail about their competitors and analogs in other markets. Part of it may be that local ecosystems are not doing a good job teaching them, but the onus is also on the founders to be prepared for these meetings.
Taking revenue for granted
It always makes us queasy when an entrepreneur believes that if he or she raises enough funds and spends that money to expand their team and complete development on a product and marketing of it, at some point the business's revenues and costs will magically break even. Unfortunately, Bangladesh is not Silicon Valley. Founders need to treat each round of funding as it could be their last, because it may be. The funding ecosystem is still pre-mature. Even if founders raise money from angels, there is no guarantee they can raise the next round from institutions, even if they have the traction and exhibit the right characteristics. Raising money from abroad sounds good in theory, but founders need very good advisers and champions with strong networks on their side, as well as extremely good communications skills, and potentially globally recognised credentials, among other things. Founders who are laser-focused on monetisation, and getting money in the bank are preferred by investors. It also gives founders a lot more leverage when speaking to investors, because they are not perpetually in a fund crisis. Customers - especially repeat ones - are the first and forever most important investors.
Being product-focused, and not business-focused
In a more mature ecosystem, founders can focus on product, and use venture capital and employee stock options to professionalise their start-up by hiring seasoned veterans from mature start-ups and corporates to handle executive functions such as marketing, operations and finance, among others. This is much harder in Bangladesh, where a corporate job is a literal meal ticket to a lifestyle that most start-ups cannot offer because frontier markets yet to have sufficient liquidity and exits. A founder, or most likely, a founding team has to be able to balance strong product ethos and development skills with the ability to manage budgets, recruit and nurture team members, build relationships with customers and close deals, communicate and negotiate with investors, etc. Business development is not as simple as "Give me money and I'll market the hell out of this on Facebook." It is a lot to ask, and that is why strong entrepreneurs are rare unicorns. This is also a reason why solo entrepreneurs need help, and younger founders may be better positioned if they spent a few years apprenticing under established entrepreneurs and organisations.
Being business-focused, and not product-focused
This is the other side of the coin. Angel investors are alarmed by a founding team without a technical co-founder, or one with deep subject matter expertise creating or developing products and solutions in the sector they want to work in. They assume everything can be hired or outsourced. They take their product strategy and development, user experience and other matters, and therefore their customers, for granted. They underestimate how hard it is to turn on a dime, or adjust their product according to user feedback, when they are dealing with outside vendors. It is also not as simple as hiring a technical or product lead. Ultimately, the founders need to be driving this, and must have the skills to do so. Otherwise, angels are essentially paying for their tuition.
To be completed in next week's Youth Express page that will be published on April 23, 2020 Thursday
The writer is the CEO of Bangladesh Angels Network, the first platform to connect Bangladeshi start-ups with smart capital via individual and institutional investors. He can be reached at nirjhor.rahman@bdangels.co