Four Deadly Sins of a Startup Founder
An entrepreneur is often so in love with their idea, so confident in its perfection, that they begin to sin. And if it continues, they can torture their child with this selfish love.
“We have no competitors” - the phrase people who work in the Venture Capital hear more often than you can imagine. One would think, with Google, Crunchbase, and a bunch of other tools, that it’s so easy to check who solves a similar problem and how long they have been on the market.
Alas, we still hear “my baby is the most talented” from many startup founders at the idea or MVP stage. Don’t get me wrong, founders must love their startups, must do everything they can to take off their projects. But they must do this with eyes wide open. Blind confidence in the uniqueness, uncompromising genius of the project will lead to failure. Things that successful startups have in common are the absence of pride, a desire to learn, and adjust their path when needed.
“How can this investor criticise my startup? Who do they think they are? Hit the road!”
Do you think it’s too much? Oh no, the fun has just begun.
Imagine: an entrepreneur pitched their idea, and investors ripped it to shreds. It happens to the best of us, right? The criticism in such a situation is not on the entrepreneur but the idea. Still, some founders become so angry, as if the investor slapped them in the face in public. We all have vivid personalities, I get it, but never, never show your anger!
In my favourite show, Shark Tank, investor Kevin O'Leary doesn’t find the urge to say, “It's a stupid idea, it's going to zero, take it behind the barn and shoot it.” If you receive criticism, don’t get angry because criticism can save the project - you just have to hear behind a haze of resentment what exactly is being told to you.
There may be several reasons for such a passionate investor's reaction:
1. You didn’t make a point. Work on your pitch, presentation, and logic.
2. Your idea is kind of weird. The fact that your mum likes your startup is remarkable but not an indicator. Find potential clients, pitch your idea to them. Your task at this point is to answer the questions: is there a problem, and will people pay for its solution? If the answer to both questions is yes, then everything is fine, work further and confirm the idea with implementation and sales.
Your job as an entrepreneur is to hear, breathe out, sleep the night, and think hard. Trust me, you will be taken seriously when you have sales. This same Shark Tank show regularly confirms this. Strange ideas with proven traction and sales get investment on excellent terms. Investors do everything but not fight for them.
“I’ve been raising seed for six months already, can't take it anymore. I think I have a burnout.”
It is not an uncommon situation. But fundraising is not a sprint. It is a marathon, even an ultramarathon in Death Valley full of crawling entrepreneurs (or those who stopped crawling and just lay) towards the money. They write letters into the abyss, and the abyss looks at them with pity.
If you find yourself among these people, take a break, switch over. Put aside fundraising and channel the rest of your passion towards the project, such as selling. Understand why you are failing. Collect the feedback, analyse 'No’s' that you received, and work over your mistakes.
Investors always refuse for a reason: either the stage of your project is too early, and you should find other ways of financing (like grants), or you need to confirm the viability of the idea with sales. Or maybe you’re just knocking at the wrong door. Anyway, do not get discouraged, brace yourself and keep hustling!
“I value my startup at $5m. We have been on the market for a year and sold for $100 000.”
Startup Valuation is the eternal fight of good and evil. Who is who - up to you, our reader, depending on whose side you are on. Founders want to sell at a higher price, and investors want to buy at a lower price - no fresh news.
So what is to be done when negotiations with an investor are around the corner?
Imagine a founder who is preparing a beautiful pitch deck. They put some important information and numbers: income, expenses, cash flow, and 5X growth in two years. It may come as a surprise - but all this directly affects startup valuation.
That is why the financial model is pretty much the first thing investors ask when a startup is trying to raise funds. Every VC looks at the model and decides for themselves (based on all factors known, such as the kind of team there is, what type of product or service it has, etc.) how much the project costs and what share he wants in it. The rest is a matter of negotiations.
What shall you do as a founder? How to prepare for negotiations and understand the range in which you are bargaining?
Make sure you have a financial model. The valuation must be a part of it (there are many ways to evaluate a startup, google it). Take at least two valuation methods and voilà! You can already see this very 'range'. If you disagree with it, think about how you can improve your offer.
Also, decide how badly you want this or that particular investor; what can they give besides money? There is no clear-cut answer, but you should know the range and step into negotiations armed with facts and logic behind your forecasts. Otherwise, you are either greedy or not prepared (Lord knows what is worse).
I bet you already knew things I said or even recognised yourself in some situations. Keep these facts in mind and try hard not to enlarge the collection of that 99.9% who fall. Open your eyes and ears, talk to clients as much as possible, understand the market. Be attentive to the feedback from investors because they are not some kind of beasts, they also want to make money.