Investing In Startups — An Interview With VC Maha Ibrahim

How do investors decide which companies to invest in? What do you need to do to convince them? And what can we learn from their experience with so many startups?

Maha Ibrahim is a general partner at venture capital firm, Canaan Partners, where she invests in early stage enterprise software and B2C startups. Maha in was an early investor in Kabam, among other companies. In my interview with Maha for Beyond Product, she discussed how she makes investment decisions, what founders need to do to convince her to invest, and shares her advice for startup founders. Below are excerpts from our conversation:

Investment Decisions

I’m always curious about early investment decisions — before a founder or company has much to demonstrate. Most early stage VCs talk about investing in the team first. Maha is more pragmatic, “As a general rule, I’m looking for markets. Above all, I need to be investing in a company that can house a multiple billion-dollar outcome. So the size of market and timing is table stakes, and if I can’t see my way to there being a massive outcome for the company, I will not invest in it.”

Timing is also important,”“Is the timing right for this technology, for this opportunity to really allow this company to excel and grow? When we get it wrong, it’s typically because we’ve gotten that market size and market timing wrong. So that is table stakes…”

“Then I look at team, is this team nimble enough, are they intelligent enough, are they driven enough to navigate the perils of startup and opportunities of a startup in this opportunity, in this timeframe, in this agency of life. So I’m mainly looking at those two criteria and then, in the context of enterprise and consumer, I then think about what profile of company and team will allow that company to grow.”

“If I’m going to invest large dollars, I need to really be a believer, almost in a religious zealotry sense, that there is a massive opportunity and that the timing is right.”

The Pitch

So how does a startup founder convince Maha? “The CEO and team need to be a chief sales officer and a chief visionary of the company. Yes, they need to execute. Yes, they need to be able to hire. But first and foremost, they need to set the tone for the entire company and investors and customers of where the company is going and what they aspire to do. So, in that first meeting, I’m really looking for a CEO to make me a believer.

“Usually, I have some sense of the opportunity. But in most cases, I turn down deals. I may invest in two companies a year out of 300. The ones that I invest in are usually because that CEO is able to convince me that there’s a massive opportunity for what they do and that they’re uniquely positioned to take advantage of it. ”

How do they do that? “At at the early stage, if there was already a market for it, there would probably already be five companies in it… I’m looking for a CEO who can come in and not necessarily give a TAM analysis, although that’s nice. Usually, they’re able to talk about it based on their own experiences because they uniquely see an opportunity and a white space. So, their ability to articulate what that what space is and how big that white space is and why that white space can be solved now is of utmost importance.”

Common Pitfalls

What are the most common mistakes Maha sees these companies make? “The most common mistake is to commit to your product from day one. What startups should be doing is getting a product to market and getting as much feedback from customers and partners and advisors as possible so they can iterate, iterate, iterate. The hardest thing is when you are so committed to your product on day one that you spend so much money, so many resources blowing that product out in the market only to see it fail.”

“I’m not a fan of that stealth concept because, as an early stage company, you need as much feedback from the marketplace as possible. And you can only do that when you’re talking to customers, when you’re talking to partners who have lived in it for a while.”

Maha shared the story of one of her investments, Kabam, which pivoted multiple times before achieving success, “Kabam, which sold last year, is a large mobile gaming company. We didn’t start out as a mobile gaming company and two iterations later, we weren’t a mobile gaming company. We just had a very thoughtful smart team, a very driven team that was looking for use cases of its technology and its expertise and happened to be in the right place at the right time when the mobile gaming landscape took off. Had they been overly committed to their technology and their use case for the technology, they never would have landed where they did… Usually, a company will pivot once or instead of moving 90 degrees, they maybe pivot 20 degrees … These guys, they made wholesale changes in the company and they were able to thrive. That’s rare.”

Patience

How do you buy that time to test and pivot? “Most experienced early stage investors understand that where you started is not going to be where you end up. We understand that we need to really be patient until we find that perfect storm of market timing and product market and market size. And when we do that, we can press on the gas but not until then. The expectations for growth really don’t come until you find that perfect recipe. You just can’t use a ton of capital to get there. And when you do get there, then you can really press on the gas and then you can think about go to market strategy and how to get customers efficiently.”

The Role of Marketing

“Marketing, at that early stage, is much more about product marketing… Those early days are incredibly critical in getting market feedback. So, it’s less about performance marketing at the early days. It’s much more about what are the features that are causing my customers to use this product once and then come back and come back and come back without having me have to pay to acquire that customer again. So those early days should be spent in very close communication and contact with the customer, whether it’s enterprise or consumer, and really diving into what the features are, what the mechanics are of the product that are enticing the customers, that are attractive to customers, and what are aspects of the product that are less needed and what are aspects of the product that you don’t have yet that really need to be put in place. Hopefully you can get to the point where the recipe is right, then you can think about what is now called performance marketing — what input of dollar do I have to put in to get the output that I want in terms of revenue and user economics.”

Advice for Founders

Maha’s most important advice for founders: “The biggest issue is that jump between early customer attraction and scale. So, think a lot in those early days about what keeps customers coming back and coming back and using your product. The reason that Facebook, for instance, has been so successful is people come back to it multiple times a day through their notifications or to see their friends, and this is true of social media generally, not just Facebook. I’m not saying that the only company you should fund is a social networking company, this is absolutely true of enterprise companies: What is in your product that is irreplaceable to customers? What is in your product that customers use multiple times a day for an hour or a minute? If you can find that, you have a huge business.”

Listen to the full interview with Maha:

You can find Maha on Twitter.

For more from Maha Ibrahim and the other 50 startup leaders interviewed for Beyond Product, you can pick up your copy at Amazon.com, B&N or one of your other favorite retailers.