One of the most critical things for any start-up company is ensuring solid financial backing, whether it is from private investors, venture capital firms, or angel investors. This is on the mind of every chief executive officer in every start-up company.
As someone who has spent a large portion of his career navigating the ever-changing technology world, I have developed a unique perspective when it comes to what investors are looking for when adding start-up companies to their portfolio. This is because I’ve been on both sides of the investment coin.
On one side, I’ve been an investor in start-up companies for many years, both as an angel investor and as a venture capital investor. I have also served on the board of directors for several start-up companies. I’ve seen start-up companies do very well… and not so well.
On the other side, I’m the co-founder and chief executive officer of Vennli, with the responsibility of guiding this young, innovative growth strategy SaaS company into the realm of financial stability. It’s my job to assess the risk factors inherent to the investment in my company. It’s an interesting experience to be in the co-founder seat of a company when everything is in your control. I find this both stressful and satisfying.
First, let's start with defining the stages of a start-up company. The term “start-up�? can be very broad. To break this down, let’s consider three important phases that start-up companies will navigate throughout their first couple of years in operation:
Pre-Revenue Stage: This is when a company has a team built and is out there interacting with clients. There is no real money being made at this time, but there are a lot of important contacts being made.
Early-Stage: Now the company is operating as a full-fledged company. They are beginning to make money but still very early in their development. This stage can easily last a year.
Operating Stage: This is when all the pieces of a start-up company come together. The CEO is really starting to think about the scaling of the company and looking at growing their business through investors. This is a terrific situation to be in because it is also the time when great partnerships are created.
When investors are looking at new technology, they know that the technology field is a very cyclical one and often what is important today can change very soon. Start-up companies need to have a solid understanding of their market and the customer pain points they address (the problem that the software or hardware product is solving). A strong product/market fit helps them present a strong story to potential investors.
A few words of advice to a CEO of a start-up company looking to effectively sell themselves and their company to potential investors during the operating stage:
- Make sure there is a strong company business plan in place. This is called a pitch deck and it comprises of a series of PowerPoint slides outlining the overall business plan. I firmly believe the shorter the pitch deck the better. Keep it to six slides or less. The days of long business plans are over. Investors want to see the logic of the business plan expressed in strategic context. They want information on why your team has the ability to take your technology to market. I’ve found Harvard Business Review's How to Build a Better Business Plan to be a great resource for creating a strong pitch deck.
- Assemble a strong team. I want to emphasize the word 'team.’ I firmly believe that assembling the right mix of executive and management team members to address the scope of the product's opportunity in the marketplace is extremely important. As an investor, I believe a single person company is dangerous. A start-up company needs at least two or three minds to thoroughly think through all aspects of their product. It is also important to be surrounded by a strong board of directors and group of early investors, especially ones that plan on being there over multiple years.
- Start the process of talking to financial groups early. Be prepared and do your research so you understand the pros and cons of each type of investor. It is important to start making connections with leading individual investors, angel investors, venture capital groups, and state or local groups.
- Make sure you have built the product you are planning to take to market. It’s essential that you can demonstrate to investors that you can ship a bullet-proof product. It’s also important to be able to show that final product to both potential clients and investors. It took us over a year to design our product at Vennli and during that time we continued to make improvements. We went through an extensive beta-testing period to see how clients utilized our product, and we also obtained (and acted on!) their feedback. This was important in validating the pain point we address. I also learned that this type of testing is a great indicator of what your early revenue will be.
As a leader of a start-up company, it’s important to put yourself in the shoes of your potential investors. They are essentially your customer, and you need to know what is of value to them and how they make their investment decisions.
In the next post, I’ll look in more depth at how to select that right investment firm. There are many firms out there and finding the right fit is like entering a unique marriage. Stay tuned for more!