It is always a surprise when a startup declines an investment offer, even if it’s a tempting one. What drives such decisions and can you, as an investor, prevent them from happening?
The majority of resources tell only one side of the story, which is why investors will not put money in startups. It usually comes down to pointing out all mistakes young companies do, without really showing interest in resolving the issues. Yes, startups usually try to implement certain changes to become more attractive to investors, but it’s only the tip of the iceberg. Above all, however, they will be looking for an offer that suits them the most, so they might get a little picky and choose to decline your proposition and turn to another fund. This is where investors need to intervene.
Key features of a good deal for investors
To understand the issue, let’s have a look at why invest in startups in the first place. these companies have a higher risk of failing than any other type of enterprise, and yet, they are still game changers. The money you put in a startup is not a treat, it’s a promise for creating more revenue and multiplying the amount at least 10 times. You won’t invest in a company that is expected to return 2 or 5 times more. Money’s one of the key indicators here. Another one is an excellent team. A team of fully dedicated people that strongly believe in their vision, plus can convince you to invest in their company. Even when the idea doesn’t work out, they will still be able to pivot quickly and provide a decent financial return.
However, VCs, business angels, early, or growth stage investors all agree it’s not just about the idea of a startup. If it were only about that, funds would sink at an alarming rate and finding a potential unicorn would be much more difficult. A good deal means a combination of a well-explained idea, the right timing (it can’t be too late nor too early for the company to set roots on the market), a versatile team capable of learning new things fast, and a great market research. Startup founders that pitch these 4 points perfectly, have a much higher rate of winning investment rounds. They’re not the only attributes, obviously, but there’s no deal without them.
Why startups decide to drop investment offers
For a number of reasons, but they’re all linked to one: misunderstanding. The key to successful cooperation between startup and investor is maintaining good relations. You are not just investing money in a company. You need to think beyond the financial gain and create non-material value.
Startups aren’t looking for a loan with a strict deadline to meet and create satisfactory revenue. It’s one of their goals, of course, but what they really need, is a mentor, that is going to guide them through the process and offer advice when necessary.
Founders have their own visions for development and they will always appreciate a piece of solid advice. There is no room for attempting to take over startup’s management. It might be a problem with some investors, who, without having prior entrepreneurial experience, may suggest introducing changes that will not work in all situations. It’s good to try and adapt advice to the current environment.
What’s also interesting, is that startups are often not ready to take the offer. It seems all’s going well, until investors reveal the list of expectations. Above all, it must be a mutual cooperation, a symbiosis that creates equal value for both parties with the same amount of effort put in.
What makes a good investor?
Having set the grounds, it is time to focus on the positive traits of investors. Due to the increase in the number of VC firms or business angels’ networks, there are plenty of opportunities for startups to raise funding. The latest 2017 Yearbook by NVCA (National Venture Capital Association) shows that the number of VC funds has reached an optimal level and is growing steadily, opposed to the 10-year drop between 2005 and 2015. It simply means the competition is not going to shrink too soon. In order to remain attractive to startups, investors need to follow a few rules. These, however, are to be implemented in the company, not only used once towards a specific entity. The experience of all Wolves Summit conferences helps a lot in pointing out some of the most important characteristics.
Keep reading to find out what traits make a good investor. They are in no particular order.
Key thing to remember at all times: you do not just add the money, there is much more behind the cooperation with startups. As mentioned above, founders primarily look for advice and mentoring. Examples from inside and outside the startup ecosystem prove that subsidies are not the best solution to development. Even the popular saying states you should give a man a fish to feed him for a day, but teaching him how to fish will feed him for a lifetime. It is especially noticed in supporting the developing countries. Providing financial aid must go along with creating new opportunities, eg. building schools, financing scholarships, or drilling water wells.
Hence the next highly respected feature, helping with further fundraising. There’s little chance the startup you mentor will be happy with finishing after your round of investment. Since you have a wide business network at hand, it is easier to come up with diversifying financing source. Startups usually begin with bootstrapping, steadily going towards investments from the outside. If you have access to decision-makers in certain organizations, such as accelerators or governmental entities, you may suggest your founders to continue the process of fundraising from there. It will not only strengthen your position as a reliable investor and mentor, making you more attractive in the eyes of other companies, but also boost the startup from your own portfolio.
Be ready to mentor and share knowledge. Entering a startup company also means becoming a team member. And the character of such organization requires that we are willing to help, if needed. You, as an investor with vast knowledge, should want to share tips and tricks on how to run a tech company successfully. It is, after all, in your interest to get a satisfying ROI and let the startup expand on the market. Not only will it ensure the team is well-educated in terms of running a business, but it simply makes your internal relations better. The startup members need to feel like they have an expert onboard, who is excited about providing relevant knowledge. You can become friends, but please remember to keep business as professional as possible. It’s often said there are no friends in business. It doesn’t necessarily have to be true as long as you set some boundaries at the beginning of cooperation.
It leads to another aspect – being responsive. There is no use having mentors in the team, if they’re not there to help in times of trouble. You integrate with the startup, put huge amounts of money in it, so it should be your responsibility to look after the firm. Of course, the CEO, CTO, CFO, CMO, or other C’s are still valid, but they aren’t entitled to make all decisions once you are part of the company. Mutual respect and trust are key here. Startups work fast, and the decisions are made just as fast. There is no time to scheduling meetings for the following month. They don’t need to be face-to-face meetings in the first place. Sometimes many settlements can be established at a phone call or over Skype. It’s also a good choice to start using instant messengers for teams like Slack. Not only does it make the whole process more efficient, but also allows you to systematise communication within the company. Plus, you can stay in touch wherever the internet connection is available.
What may be surprising, startups often value investors who have prior entrepreneurial experience. They look for people who have gone through a similar path and know what the bigger and smaller issues of running a company are. Paradoxically, it’s simple to acquire theoretical knowledge, learn the mechanisms and definitions. What’s challenging, is the ability to implement those and not fail along the way. Founders need the practicality investors bring. Your experience as an entrepreneur shows real value behind the person. A successful enterprise in your resume? Even better. Once you know all the ups and downs companies encounter, you’re able to give advice that has actually been tested in the field. And the shift towards investing proves you know enough to mentor young tech companies.
One thing startups often struggle with, is the human capital. If you decide to invest in a specific company, you sure have reviewed and evaluated the team and its potential. Once the company starts expanding, there’s need for more professionals. Your business network can become useful in terms of finding relevant people fast. Good investors help with recruiting. Thanks to strong connections and entrepreneurial knowledge they already have, the can provide valuable leads and find highly skilled executives and professionals faster compared to a standard recruitment process. The market’s demand for talents is high while the amount of dedicated people is still relatively low. Since the competition is strong, as an investor you have the advantage of knowing best professionals personally. Whether you met them at conferences or they reached out to you some time ago, it is essential that you maintain good relations with those people. They might become part of your team one day.
These are only a few desirable traits of investors that startups cooperate with and the list is definitely longer. However, staying aligned with these will make any investor more trustworthy and chances are , they will be the number one choice when looking for funds to reach out to. Founders look for money, advice, mentoring, and non-financial resources, such as wide business network. The key output is always cooperation of highest quality and this is what both sides should strive for at all times.
Traits that make a good investor:
- it’s not just about adding the money
- helping with further fundraising
- mentoring and sharing knowledge
- being responsive
- having prior entrepreneurial experience
- helping with recruiting processes
If you are looking for innovative projects, we have launched WolesMatch Platform, where you can find companies tailored to your needs. Visit wolvesmatch.com, set up an investor profile, browse projects according to tags and filters and get access to a startup database.