Startup Mistakes That Drive Angel Investors and VCs Away! Part 2
In part one, we began an examination of the many mistakes entrepreneurs can make when pitching to angel investors and/or venture capitalists. That examination and analysis continues here, in part two.
Delusions of grandeur
Even if they concede that you have a wonderful product, concept or vision, angel investors and venture capitalists will never concede that you are entitled to compensation that rivals those of CEOs in established and successful businesses. If you are not realistic about your compensation expectations, the next question becomes, “What else is unrealistic with regard to this proposal?” Approaching investors with unrealistic salary expectations can lead the investor to question your motives. Do you seek funding to further the success of your enterprise or to further personal financial interests? Creating ambiguity in the mind of a potential investor is not an intelligent approach. While a discussion of compensation is appropriate, construct the dialogue in a manner that fairly addresses your needs and the expectations of the investor.
High compensation expectations call into to question the entrepreneur’s judgment and commitment to growing the business. Investors have learned that serious entrepreneurs are bootstrappers, people with enough confidence in their idea to commit their time, effort and money to make it a reality. Be realistic! If you don’t have the drive to invest your blood and treasure, why should anyone else!
Confidence is a wonderful trait in anyone, especially an entrepreneur. Ego and arrogance are not. Founders should be like ship captains. The captain is the last to leave the ship and the founder should be the last to be paid. Every dollar taken from the business as salary is a dollar that is unavailable to further the development of the business.
The motivation for most entrepreneurs is the prospect of increasing his/her wealth. If the investor simply hands the entrepreneur a six-figure salary, the investor is taking away an important incentive for the entrepreneur to succeed. Investors expect to see that bootstrap mentality continue post funding. The purpose of the investment is to assist the entrepreneur in achieving the goal. If the entrepreneur takes more than needed as salary and loses his drive to develop the idea, it becomes apparent to the investor that the real goal was funding, not the business.
Perceptive investors know they need to keep the entrepreneur “hungry” for success. The investor puts up money to develop the idea into a successful enterprise, not to put the founder on “easy street”. In short, never lose sight of the fact that you are a startup … if you expect market rate compensation, go get a job!
Don’t take my word for it. In this TechCrunch.com article entitled, “Peter Thiel: Best Predictor of Startup Success Is Low CEO Pay“, PayPal co-founder and early Facebook investor Peter Thiel says:
The lower the CEO salary, the more likely it is to succeed. The CEO’s salary sets a cap for everyone else. If it is set at a high level, you end up burning a whole lot more money. It aligns his interest with the equity holders. But [beyond that], it goes to whether the mission of the company is to build something new or just collect paychecks. In practice we have found that if you only ask one question, ask that.”
It is normal to draw a minimal salary, not market-rate salary. At this early stage, everyone needs to be investing in the business. Investors put in money; founders put in work. Someone drawing a market-rate salary is being fully compensated in cash and can’t be said to be investing; this only makes sense if said person is not getting equity in the business. This person would not be a co-founder then.”
Or as one anonymous user put it, the co-founder
“is not [behaving like] an entrepreneur….it sounds like he’s negotiating for a job, not making an investment. That doesn’t make him a bad person or bad worker, just a bad founding partner.”
Unrealistic views on competition
Entrepreneurs must exhibit realistic views on the nature and extent of the competition they face in the marketplace. Too many entrepreneurs are so enamored with their vision, concept or product; they fail to recognize the existence of competing ideas. The old saw, “there’s nothing new under the sun” is very close to a universal truth.
Embrace the fact that you have competition. Competition is actually “validation” of your concept, your product or your vision.
If you truly have a new concept, new product or new vision, you have the added burden of creating a new market. Not only is this challenging from an intellectual standpoint, it is financially draining.
when a large company enters a market, it validates the market in the minds of many who had not been paying attention to it before. That means customers and also eventual acquirers of your company. And there is nothing quite like a competitor to fire up a team. I’ve seen many companies start to coast a bit after they have successfully taken control of a market. Then a pesky new competitor enters, takes some business from them, and then all of a sudden the team is fired up again. All in all, I’d rather see our portfolio companies have competitors than be the only participant in the market.”
Let me be blunt. If you are so naïve that you believe you have no competition, that your idea is so unique that no one else has ever thought of it, then chances are you are not worthy of an investor’s time, much less an investor’s money.
No respect for your investor’s money
An investor’s money is no less valuable to him than your money is to you. Too many entrepreneurs seem to believe the investor’s money is somehow worth less because they have lots of it. This is ‘bull$h!t”. In most cases, investors have worked as hard, if not harder, than most to accumulate their wealth.
If you have no respect for your investor’s money, don’t ask for it.
I’m reminded of the story told me by a friend, a 3F investor, who traveled to Las Vegas with three founders of the startup in which he had invested. Not only did they fly first class and stay at the luxurious Wynn Hotel in a deluxe suite; they also had the audacity to order room service at my friend’s expense! When they met with the VC they had flown to Las Vegas to meet, my friend related the story to the venture capitalist. You can imagine the impression that made!
If you send a signal, by word or deed, that you do not value your potential investor’s money, chances are very high that you won’t see a nickel … and you shouldn’t!
Cynthia Kocialski, in her article “How To Lose An Investor Before You Finish Speaking” wrote:
Having an apparent disregard for the investors’ money will often sink a deal or make investors wary of what is to come of the start-up in the future. Two co-founders presented to angel investors and when one investor asked what if the start-up encountered problems, they flippantly replied they’d just go back to their old jobs. Investors want to know you are going to give it your best.”
An inability to execute
As a founder/entrepreneur you must demonstrate the ability to make the tough decisions, accept the risks, and most important, acknowledge responsibility for your actions.
These are qualities investors expect to see you exhibit. At the end of the day, the real investment is not so much in your startup, as it is in you and what you, as a person, bring to the table.
Your ability to execute your vision is of paramount importance to the potential investor. Taking something like coffee and transforming it into Starbucks is an example of what I’m talking about. Seventy percent of new ventures come from existing ideas that some entrepreneur transforms into something of value. That transformation is my definition of execution.
No definitive product or customer
Don’t make the mistake of expecting funding for “development” or “research”. Investors seek commercially viable products with a potential to provide them a return on their investment. If they wanted to fund research and development, they could buy stock in a biotech firm. Investors do not need you to do that!
Martin Zwilling, founder of Startup Professionals, Inc. may have said it best in his article “Angel and VC Investors Won’t Fund Your Research“:
So investors, looking for a near-term large and growing market, see technology development as a big red flag. They defer to others, like government agencies, universities, and large corporations to take that risk. You can participate, of course, with private funds and grants, but don’t expect venture money to be thrown your way”