Useful Information for Entrepreneurs

A few weeks ago, I gave an interview to Saia do Lugar, a Brazilian website which features useful information for entrepreneurs.  To read a Portuguese version, click here.  

Below, please find an English language version.

(1) What are the characteristics that investors look for in start-ups?*

1. Quality of the team

2. Quality of the team

3. Quality of the team

4. Quality of the team

5. Size of the market

6. Company growth characteristics (exponential v. arithmetic)

7. Competitive advantages (defensibility)

8. Exit potential

9. Timing

10. Quality of the idea

It is important to note that, aside from the quality of the team, which really is THE leading factor, the list is really horizontal, i.e., the characteristics are of equal importance.

(2) Is raising external capital something that is necessary for every startup?

No.  A couple of points.  First, lets distinguish between the reasons that companies seek venture capital.  Some companies seek venture capital for help recruiting, introductions to key customers, help achieving an exit, etc.  Seeking capital to grow is only one of a dozen or so common reasons why companies seek venture capital financing.  Second, lets distinguish between the types of companies that are appropriate for venture capital funding.  There are many great types of companies that do not require venture capital or are inappropriate for venture capital investment. So, for example, if you have a popular blog and you are satisfied earning money from advertising, then why would you raise venture capital?  It would not make sense.  On the other hand, perhaps you have a large, profitable company, but you require expertise to take the company to the next level.  In that case, even though you don’t need the money, you might want to raise venture capital in order to gain access to special expertise that the venture capitalists have.  So, I think that you need to distinguish between the different reasons for raising venture capital and the answer to the question of whether to raise capital will change depending on your situation.  

(3) Should a startup accept capital from the first investor that comes along?  Does the profile of each investor differ or are all investors pretty much the same?

No!  If you are hiring someone for a position in your company, do you hire the first person who walks through the door or interview multiple candidates?  The partnership between an entrepreneur and a venture capitalist is a marriage, "In happiness and in sadness until death do us part".  You should get to know many different investors before choosing one.  There are many different kinds of entrepreneurs and investors, so you need to find the right fit.  The reason why this is important is that with any company, there are inevitably going to be difficult moments, so when they come it is essential that you have someone by your side that you trust.

(4) After an investment has been made, does the venture capital firm assume control of the management of the company?  How does this work?

No. Again, we need to draw some distinctions.  First of all, investors don’t want to have anything to do with the day to day management of the company. The ideal situation, from the investor’s point of view, is that the team will do such a good job, that the investor will never have to do anything. If you think about it, this makes a lot of sense.  A venture capitalist’s job is selecting the best companies and making investments.  They don’t want to manage your company.  This is a common misconception among first time entrepreneurs.  Investors aren’t your bosses, they are your partners. In terms of control, investors normally acquire an equity interests of between 20 and 45%.  Along with the equity, they typically get a seat on the company’s board, and the company and the fund enter into a shareholder’s agreement which grants the investors (and entrepreneurs) certain mutual protections. 

(5) What are some tips for startups that want to attract venture capital?

(a) Build a working prototype or proof of concept

(b) Recruit a talented team

(c) Grow the company to profitability or break even

(d) Try to get some well-known companies as clients

(e) Make sure that you are doing something that you are passionate about, otherwise it isn’t worth it! :)

Comments

[Jane Williams]

This is a great post...

[Diego Sana]

A great team indeed should be valued as the leading factor by every VC, but what do you think about the role of the entrepreneur(s) leading this team? An amazing team lead by a not so great leader will probably fail. We saw it happen recently :(

[simonolson]

Dear Diego,

You are right. Building a company is like baking a cake, you need all of the right ingredients. It is very difficult and there are literally hundreds of ways that a company can fail. It is hard to separate an entrepreneur from a leadership role because usually he or she is the heart and soul of the company. What we usually try to do is find people who can help them in areas in which they are weak. So, for example, if an entrepreneur has a hard time with marketing, then we help them find a team member who can assume some of his or her marketing roles. If they are bad at financial controls, we try to bring in a strong CFO. It is hard, but the best founders/entrepreneurs are cognizant of their limitations and open to people who compliment their skill sets. Thanks for the question!

Simon :)

[Bear]

What a neat atricle. I had no inkling.