Is your startup investible?
At the recent How to Web conference, I sat down with Jens Lapinski (Managing Director, Techstars Berlin) to talk startups and early investment strategies. captured some of the highlights of our chat.
If you’re the founder of an early stage tech startup and you’re looking for funding, it’s important to understand the investors’ mindset first, as well as the criteria they take into consideration when evaluating early stage ideas. To help you set your expectations straight, we’ve discussed this at length with Jens Lapinski (Managing Director, Techstars Berlin) in a talk moderated by Mike Doherty (Program Director,Angelsbootcamp).
As Managing Director of TechStars, Jens is responsible for selecting startups for investment, while providing support for the Techstars Berlin program operations. On a yearly basis, he looks at around 3000 potential investments and ends up selecting 10 to 12 startups. Before joining Techstars, Jens was a partner at Forward Labs, a London-based startup studio focused on building profitable startups at high speed using lean startup principles. Jens talked about the key criteria he uses to identify promising investment opportunities and he presented the Techstars approach last November at How to Web Conference 2014 – Angel investment track.
So what should you do to make your startup an attractive investment?
Put the foundations right
“The vast majority of startups don’t get the foundations right: there’s no committed team, the founders have not worked together before, they are geographically distributed across different cities, they outsource technologies to somebody else, they don’t have the required skill set or experience, they haven’t really done their homework […] 80 to 90% of the deals I look at don’t make it exactly for these kind of reasons”, explained Jens.
It all comes down to the team
And in order to put this foundation right, it all comes down to the team. It’s true that the team is not enough, but it’s a deal breaker: investors would definitely talk to a very interesting team, as Jens points out, and will not take into consideration a team that cannot prove its execution capability and competitive edge.
“When you’re hiring people, you always look for two things: motivation & past accomplishments. People that have great accomplishments in the past prove their motivation and are more likely to keep going on the same line in the future. The same goes for startup founders”, explains Jens.
Know your customers
Once you’ve got the team and you’ve set the foundation right, it’s important to understand your customers.
“The first question I ask the teams is “Who are your customers”. If they have a precise answer to this question, than the probability to build a product that actually serves their need is higher”, says Jens.
Understand the market you’re operating on
Not only should you know the market your operating on (trends, competitors), but you should also convince the investor that there is a market for the specific product you’re building and that this market isn’t already overrun by dozen of competitors. And the situation may get tricky here: even if you may think that addressing a huge market is great news for you, this may scare investors off.
“If the market is very large, you will require boatloads of capital to address it and it’s highly questionable if you are going to make it.”, as Jens points out
As a result, he is looking for companies that can grow quickly enough without requiring lots of capital early on, and the really interesting ones are those that address a meaningful market (and not a huge one) that is expected to grow over time.
Choose your business model and the investor that’s right for it
There are three fundamental approaches you can use when choosing your business model: you can charge consumers directly, charge businesses directly, or develop an advertising monetization plan. There’s no wrong or right here, but you have to understand that investors generally have their business model of choice, and understanding their preferences will increase your chances of raising money. Jens, for example, is very comfortable investing in B2B companies, while he only looks at the B2C products that don’t require physical inventories, such as booking apps. And this varies from one investor to another.
Avoid using buzzwords
Let’s take a simple example: you’re a sharing economy business. That’s great, but what does this mean and what do you actually do? Contrary to your expectations, the buzzwords you use are not helping you, but shutting you down. Investors don’t like big words: they invest in you and your product, so you’d better make sure they understand from the start what are you working on.
Aim low / talk low
“If you want to raise 1 million, say you’d like 500k. That’s because if you only manage to raise 800k you can end up being a failure, or you can announce you’ve been oversubscribed and get anyone to believe that your company is hot”, he advises.
Go the angel route first
Last but not least, Jens recommends founders looking for money to try raising an angel round first, before approaching VCs.
“If you raise angel money and get really large, you will also become interesting for VCs and you will close the round faster than if you go the VC route first, now that you have the social proof from all the angels”, he concludes.
Curious to find out some more insights on the Techstars approach to selecting startups for investments? Than take a look at the “Evaluating early stage ideas”panel from How to Web Conference 2014 – Angel Investment Track
Watch the interview –
How Techstars Evaluates Startups