Every technology investment cycle has been accompanied by the rally cry “This time is different”. As valuations continue to be marked down amid a bone-dry IPO market, it’s that much more important to focus on how to improve start-up success rates.
Technology entrepreneurs we talk to share two common issues: one is getting overwhelmed by inappropriate capital allocations, and the other is their frustration over meddling by early-stage investors posturing for an eventual exit.
We suggest the following five steps to improve start-up success rates:
- Understand the Entrepreneur
Investors should take care to understand the entrepreneur. Gain insights into his/her thought process. What drives them? How effectively do they articulate their vision for their market and their company’s relative competitive position to impact the market?
How have past experiences strengthened them – or exposed their weaknesses? What adversities have they faced and how did they overcome them?
Can they communicate well with stakeholders – both internal and external? Are they credible?
The entrepreneur’s leadership team should reflect his/her profile. This is where the seed of partnership is formed as start-up teams and their investors establish mutual needs and trust to assess whether the chemistry is right.
- Understand the Strategy
Is the entrepreneur’s strategy sound? Does the product/service offering and road map match the strategy and business plan? A better mousetrap for the sake of building one is misplaced energy without thoroughly understanding market fundamental drivers.
Further, financial market valuations reflect investors’ perception of where a space is headed and what a company’s prospects are. In rapidly evolving tech markets, assessments – and valuations – can change quickly.
Without sufficient due diligence, including a meaningful deep-dive into the technology/product/service offering, investors are restricted from making measured decisions. It also prevents the start-up’s VCs from providing qualified advice.
How often have we seen late-round investors chase premium valuations without fully understanding the path to long-term customer acquisition, revenue growth and yes, profitability? “Exit strategy” should not be about dumping an over-valued company on under-informed IPO investors – regardless of their sophistication. Instead, the objective should be a win-win for all parties concerned.
- Be the Consultant
Many start-ups often operate in a vacuum. What many entrepreneurs need is a trusted, objective consultant to fine tune and validate strategy, plans, products, and model operating/capital costs.
Early investors, including VCs, can simultaneously facilitate implementation through connections, sharing market research and cross-pollinating with other relevant portfolio companies. This is where the partnership is truly defined.
Company CEOs and CFOs should also be versed on effectively communicating with investors. This includes honing the strategic value message behind the company’s story. Managements must also determine the metrics that the investment community regards as most relevant, and then decide on which ones to share.
- Value the Business, Not the Exit
Without the first three steps, proper valuation is not really possible. As a result, many start-ups are either under- or over-funded. In either case, the investors cannot gauge the appropriate value of the business. The answer is not merely in looking at “the comps”.
With more pressure on bigger exits, there has been a tendency to over-fund and over-value “hot” start-ups and too rapidly cast aside founders in place of “professional management”. The more effectively founding management can communicate their strategic value message the better they can defend against either situation.
It’s not for management to determine valuation; the market will do that. But it is incumbent on them to make as much non-sensitive information available as possible to better equip investors to do their valuation analysis.
- Hone the Message
Once the fundamental research and understanding have been established, the VC can work with the entrepreneur to hone the “pitch”. Many technology start-ups are founded by brilliant engineers or coders. What’s intuitive and obvious to them is not so to potential investors.
While the technology underlying the product or service offering must be sound, one of the biggest challenges technology companies face is rising above the noise to communicate a clear, concise and consistent value message that compels investors to action. Investors need a hook. Give them one.
Benefiting All Parties Longer-Term
No one understands a founder’s raison d’etre better than they do. They birthed the idea. No professional management can co-opt this understanding. This is not to say that experienced professionals cannot be an asset; quite the contrary.
Investors and VCs that commit to these steps can make instrumental introductions that further the partnership between the business and themselves.
Success rates are low. Volatile markets make navigation more turbulent. Increased regulatory and compliance requirements are costly thorns. Finicky investors with much shorter time horizons are the norm. This time is not different.
Much like the steroid-enhanced era in baseball, there is now excessive investment emphasis on prodigious home runs rather than batting averages made up of many singles and doubles.
The hallmarks to improve start-up success rates are stronger entrepreneur-investor partnerships, sounder business models and operating performance, and better communication that facilitates more accurate valuations. That’s how to satisfy the needs of all stakeholders in the long run.
Contact us today for a briefing.