By Matthew Cushen
Just because it is now clichéd doesn’t undermine the truth. For investors, the team is the most important criteria when making an investment. But beyond the headline truth, what makes a founder or a founding team attractive?
For a start, experienced investors have worked out that who you’d recruit into your current or previous business is not the same as who you would back with funding. So it figures that the way you market yourself for investment is going to be different from the way you may have approached job hunting.
Within Worth Capital we, right from an initial piece of paper, through every e-mail, phone call or meeting, are relentless in looking for clues across 6 areas:
We value experience in the market space the business is targeting and expertise in the areas needed to make the business model work. For example, when building a new food or beverage brand there are three aspects of the business that are critical: developing a product people will love and want to buy repeatedly; being able to create and nurture a compelling brand and then being able to sell into retailers and distributors. When this type of business is looking for even their earliest investment they will have the product and at least an early incarnation of the brand – enough for an investor to agree or not with the potential. The punt the investor has to take is on the tenacity and negotiating skills needed to deal with retail and wholesale buyers.
Tip: ask yourself what are the really important skills and behaviours needed to execute your proposition? And focus on your relevant experience.
Going from start-up to scale-up has many challenges, so anyone with the battlescars of doing this before will naturally be better able to anticipate challenges and avoid the same mistakes. The previous business does not necessarily have to be successful, as long as the entrepreneur is able to show they have analysed and learnt from the problems and mistakes. Someone that has successfully built and exited a business is hugely attractive, enough so to command a premium on the valuation of their new venture.
Tip: don’t hide any entrepreneurial failures, be open and ready to discuss what you have learned.
2. Resilience & tenacity
Regardless of whether a business is flying or struggling to grow, every founder will need boundless energy & determination to overcome the inevitable bumps, or chasms, in the road. This is both physical and mental energy. There is some recognition now from investors that we have a duty (and self-interest) to look out for the mental health of those we invest in. But fundamentally, an entrepreneur needs to recognise in advance that growing a business, and particularly a business that has shareholders, is a stressful undertaking that will stress the founders, as well as those that love them.
Evidence of the kind of grit needed doesn’t have to be related to business. We invested in a founder who had run the bonkers Marathon Des Sables – we’ve never found more compelling evidence of tenacity. And unlike many other fund managers, if all else is equal, we’d be more likely to invest in someone from a deprived area and background than someone with a privileged, easier background.
Tip: delve deep into yourself and find the evidence of resilience & tenacity, and if you cannot find it then really question whether the life of an entrepreneur is for you.
3. Relentless curiosity
Steve Jobs said ‘creativity is just connecting things’. But to have things to connect you need to be relentless in seeking out the views of others. Put another way to be able to ‘join up the dots’ and work out what is important you need to have gathered plenty of raw dots.
Whilst an entrepreneur needs to be tenacious and driven, that can all too easily tip over into being blinkered and incapable of learning and adapting their business. It is essential you put in structures to gather data from your existing customers, to turn that into insight and actions to improve.
Tip: this might be counter intuitive, but one of the worst ways to sell an investment opportunity is to pitch. Much more productive is to get into a two-way conversation, where you give more opportunity for the investor to explore what is important to them, and you can demonstrate your ability to listen, analyse and respond.
4. Compelling communication
A pre-requisite for any entrepreneur is to be able to articulate clearly and excite people. Whether this is their proposition to customers or a clear strategy, priorities and decisions for a team. Although an investment case might be made before a super strong brand has been developed, it should still be able to describe the proposition and bring to life why customers would care and what would excite them.
Tip: take great care to create documents and to use words that really bring your proposition and/or brand to life (and that show you are fastidious with the detail). You are not just trying to excite the investor, you are also convincing them you can excite potential customers.
No individual has fully realised their potential and no founding team covers all the bases. We like to see awareness, openness and honesty about gaps in the team’s experience or expertise and a plan to bridge the gaps.
We are naturally biased towards businesses with a team rather than one individual. However talented an individual may be, they will not have all the skills necessary to build a business and it can be a lonely task. It is much easier to maintain motivation and momentum with two or three people. However, more than that can start to get unwieldly and is unattractive to investors as share ownership is already diluted between co-founders.
Tip: question yourself/yourselves as to the strength of the team and be open with investors on where you see the gaps that need to be filled. (By the way, more about identifying and filling gaps in my next column).
All the previous five areas can be demonstrated – on paper and even more so in person – when meeting investors. This last area is more difficult to anticipate. But most investors, and definitely those like us who get involved in helping build the business, won’t invest in someone where there isn’t that intangible spark of chemistry. Investors are the ones with the money, they generally don’t have to invest and definitely won’t if they think it is going to be a chore. At a consulting business I used to work at, we had the flight delay test – would you be OK spending 10 hours at an airport with someone if your flight was delayed? Given that Worth Capital actively help the businesses we invest in, we ask ourselves if we do want to hang out with an entrepreneur, and if we’d be motivated to put in the effort. If we are fighting over who will be the Investor Director we take it as a good sign.
Tip: do some research on your potential investors, as well as the kind of due diligence you should be doing anyway, you can see if there are some sparks of personal connection.