đ Hey, Iâm Jamie, and Iâm here to share actionable advice to help you raise money and grow your startup.
Itâs Halloween so letâs talk about what spookâs investors đ»
Sorry, I had to. AnywayâŠ..
VC Leo Polovets says that that startups are a bundle of risks.
Now Investors are in the business of taking risks, but it has to be intelligent risk.
Not stupid risk like riding a motorcycle drunk or gambling your last 10k in Vegas.
What you want to prove is that the risks you are taking are intelligent business risks. Risks because you are trying something new and innovative, something that could be huge if it works.
Not that you are a risk because you have made a bunch of easy to avoid mistakes.
Thereâs many flavours of risk that we could talk about, but today I just want to focus on red flags.
These are the ones that will have investors running for the hills. These are rookie mistakes. For some of you, these might be blindingly obvious, but for others you might see something on this list that makes you think twice.
Letâs get to it đ
Alright, jumping straight into it with our first red flag.
You outsourced your core tech.
If you want to start a tech company, you canât outsource your product development.
Full stop.
If you are not building your core tech in house, let me save you time and say there really isnât any point you speaking with VCs.
They do not want to invest in teams that arenât building their own product. You just canât win if the people that control your success or failure is some random dev shop in the middle of nowhere - it doesnât work. So investors want to know - who is building your tech?
If itâs not you then go back to the drawing board and either find a technical co-founder, learn to code yourself, or hire someone yourself.
It's okay to outsource some things - for example you might hire a design agency to do a full rebrand. However, your core product development and engineering should be handled by you and your team.
You canât explain why you are different to your competitors.
You must have a deep understanding of your market, and be able to explain where you sit within that market.
A question to ask yourself is âWhat do you understand about this market that your competitors donâtâ.
This is a great question which I believe comes either from the YC application or I picked up from someone there, and itâs a great one to meditate on.
Some founders might think they have no competition. Most of the time this isnât true. And if it is true, it can also be a red flag as it might indicate a lack of market need for what you are building.
You donât have key numbers at your fingertips.
You should know the key numbers about your business like the back of your hand.
How many customers do you currently have?
How much do they pay?
Whatâs your conversion from free to paid?
Whatâs your growth rate?
etc
Knowing critical numbers back to front is table stakes. You need to be able to talk confidently about the core metrics of your business.
Now, itâs acceptable if you donât have certain numbers because they just arenât available at your stage - things like CLV (Customer Lifetime Value) might be an example, but your answer should never be âIâm not sure, I will have to get back to you on that/speak with my cofounder/phone a friendâ.
Have your numbers ready.
You spent money you previously raised without any clear progress.
I was at an event the other day, and there was a guy giving a presentation on his company raising itâs Series A. This company, which I wonât name for obvious reasons, had previously raised $3m.
The problem was, after three years and $3m dollars, this company still hadnât launched itâs app - let alone had any revenue.
If you have managed to spend $3m with essentially nothing to show from it, thatâs probably the last money you will be able to raise.
For each fundraising cycle, you need to be able to show what you have done with the money, what you learned, how that moved the needle. This is the case right from pre-seed through to IPO.
Think of it like levelling up in a video game, to pass to the next level you need to get enough points in the current level.
You give evasive answers.
Hereâs a good rule of thumb - if you arenât sure about something, just say so!
Donât pretend you know if you donât. You blagging your way through is going to be obvious to investors that spend all day talking to founders.
There are going to be questions that come up that you donât have a great answer for today. Key to answering these is to be clear about how you are thinking about the question, and how you are planning to answer it in future.
For example, you might not know what your main customer acquisition channels are going to be. What you can do is talk about what you think the most likely channels are, the ones youâve tested so far and the way you plan to find out which ones work in future.
Being evasive with the truth is something that investors are extremely sensitive to. As your mom taught you - itâs always better to be honest.
You had a previous cofounder that left, taking a big chunk of the company with them.
Sometimes cofounders leave, and that sucks. Cofounder breakup is a huge killer of startups.
Weâve talked previously about cap table mistakes, so I wonât go into too much detail here, but if you have a cofounder that left the company and still owns a huge chunk of the company, youâre going to have serious problems raising money.
Investors hate seeing this kind of âdead woodâ on the cap table.
One thing to do if you have a cofounder leaving is try to negotiate on the equity they own. Explain that itâs better to own a small amount of equity in a company that is still alive rather than âwhat you are owedâ in a company that wonât survive another year.
They might think they earned that equity, and likely enough they did. But they wonât have anything if the company is dead.
5% of something is better than 20% of nothing.
So thatâs the 6 red flags I wanted to talk about today. Some of these are pretty basic, but itâs critical to get the basics right.
All companies are a bundle of risks. Beyond the necessary risks of starting a new business, you need to avoid these risks otherwise investors will bounce of you like Teflon.
I hope talking about these red flags will help you avoid them.
Until next time,
Jamie
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