6 Core Principles for Start-up Founders
Lessons learnt and ideas shared from an Investor
As an investor, I’ve been lucky enough to meet many amazing start-ups and founders. For all the ones I’ve invested in, there are many I’ve missed (Revolut in 2018 hurts the most!). Over recent months, I found myself reflecting on these experiences and trying to identify commonalities. Unsurprisingly there are parallels with topics I regularly discuss with founders today, and so, with a strawberry daiquiri in hand (and a seat on my overused-during-lockdown couch) the writing began. Of course there is no single path to success, all I hope is these 6 Core Principles for Start-up Founders address some of the questions that arise on that journey.
Principle #1 — Only raise what you need
“How much capital should we raise?”
Todays’ investment landscape is one rich with capital as funds have more dry powder than ever before. I could write a much longer post all about the dynamics of fundraising in todays market (appropriate timing, deal structure etc) but the main premise is, raising more capital than you need (or know what to do with) can lead to inefficient decisions. There is a misconception that ‘more capital = higher probability of success’, however, I’d argue the equation should be ‘sufficient level of capital for growth plans = higher probability of success’.
Having a ton of cash sitting in the bank can cause problems as management are more likely to make inefficient decisions. Want a pinball table in your kitchen? Done (ok this isn’t a huge issue). How about we triple the R&D budget to build random product features? (yes, this is an issue). The amount raised should be a direct output from your business plan. Yes, you should be ambitious — Set yourself stretch targets and use this to form a 1–2 year budget… add a 10–20% buffer and you’ve got your funding need.
From a financial point of view, large rounds = large valuations, and as Eamonn Carey, MD at Techstars, nicely explains here, big valuations can come back to bite if you don’t live up to them.
The final consideration is dilution. As a founder, the more external money you raise, the business you are giving away. You would likely be better off waiting for that valuation to develop and raising on more preferable terms.
Principle #2 — Be laser focused on your core business
“‘Is it better to be #1 in a market, or have a weaker presence in several markets?” “Should you focus on one hero product, or use resources to develop a product portfolio?”
I’m a big believer in focus and specialisation. To borrow from Jim Collin’s Hedgehog Concept -“Foxes know many things, but the hedgehog knows one big thing”. Many of the great thinkers and businesses of our time have had a hedgehog mentality, which at its core is an understanding of what you can be the best at, coupled with a drive to make that a reality.
When it comes to start-ups, I believe you need to be laser focused on your core business, build a defensive position with long-term growth prospects, and then go after other opportunities. I’d rather see one amazing product which resonates with a loyal customer base vs. 5 average products. Likewise I’d rather see a dominant position in one market vs. a competitive presence in several.
I often meet founders who are thrilled to explain the future upside opportunities and how this translates into a $1bn+ opportunity! It sounds great, but how much time will be diverted away from the core operations? Show a well planned roadmap with upside and i’m a happy investor (and buy into the vision). Spend half the meeting talking about how you want to launch 5 new countries next year, and i’m worried. The best founders are able to walk the tightrope between laser focus and seeing the bigger vision.
Principle #3 — Follow the Customer
The majority of strategic decisions should be focused on your customer, as they are the ones already using your product! With the right feedback loop in place, you can hear almost real-time what is and isn’t working, source new product ideas and keep tabs on the competition.
When it comes to growth planning, your customer base will give you the best indications of where you are finding early traction. Are you thinking about which geography to enter? Best bet you will already have pull from users in those locations, and if you don’t, then perhaps the value proposition isn’t right for that market. Same thing for product features and pricing strategy — follow the customer.
One of the key elements to this is the importance of data to inform decision making. In my experience, the best businesses are obsessed with customer data. Consumer facing start-ups should have clear customer support lines, solicit feedback and incentivise customers to provide suggestions. Enterprise serving start-ups with a smaller relative customer base have it easier — establish key account owners and check-in at regular frequency with each customer.
Principle #4 — Not all Investors are Created Equal
“Which investor(s) should we go with for this round?”
There is no shortage of capital today for promising start-ups, and strong founders can choose which investors they bring into the tent. Choosing the right partners is a key decision and will increase your chances of success.
So, what should you be thinking about when selecting an investor?
- Cultural Fit — Arguably the most important criteria. If everything goes well, you will be with your investors for 5+ years! A good investor is half friend and half advisor — someone you can share a drink with, but also gives you the hard truths and a dose of reality
- Domain Knowledge — Anyone sitting around the table should know the industry inside out and understand your business model in all its detail. The best investors will know the market almost as well as you do ;)
- Ability to add Value — Capital is a commodity, and investors should bring more value than a balance sheet. The two real components here are network and operational support. A strong network can help with customer intros, employee hiring, marketing and much more. Operational support might be a more hands-on approach, whether that be in-house expert teams, or deep industry understanding to help with bottlenecks and best practice.
- Share of Mind — This is investor specific and everyone manages their time differently, however if your investor has +10 other portfolio companies, how can you ensure your business gets the attention and focus it needs?
One criteria which I don't think is important — ‘Deep pockets’ or investors who say their value is having a lot of capital. The best investors raise new funds at a regular cadence and it’s unlikely they won’t be able to support at least part of your future funding needs. If they cant, they will know other suitable investors who can. Deep pockets can facilitate internal funding rounds which saves time and is definitely a positive, however I believe it is outranked by the above.
Principle #5 — Look in the Mirror before you look out the Window
“Who are your main competitors and how are you differentiated?”
This might be slightly contentious, but I think start-ups need to focus on themselves before their competitors. Drawing from YC’s pocket guide of start-up advice “Ignore your competitors, you will more likely die of suicide than murder”.
To preface this, any good start-up idea needs to be founded in the realms of intelligence. It is unlikely the founders haven’t already extensively researched their market, understand their positioning, and believe they have a right to win. If you have this, the bigger risk is you fail on execution, rather than a competitor kills you along the way.
Investors tend to be very focused on competition as it is easy to point to other businesses as a threat. Late stage investors in particular spend a large part of their time understanding the competitive landscape (and sustainable competitive advantage is a key investment criteria). However, I’d argue early stage investors shouldnt be so beholden to this and recognise the future is unknown. There is no guarantee those 2 or 3 other competitors will exist in 5 years time, and who is to say the market wont grow to support multiple winners? I’ve seen investment committees reject deals due to concerns around competition, only for those start-ups to become roaring success (and committees left kicking themselves). I’d rather back a promising team with a great idea in a slightly competitive market, than miss out on it entirely.
By extension, start-ups can be too focused on competitors and lose track of their own objectives. Keep tabs on your competitors yes, but spend the majority of your time being the best you can be.
Principle #6 — Keep Believing Relentlessly
Being an entrepreneur is hard — 9 out of 10 start-ups fail, and a large portion of those fail within the first 2 years. However, these odds don’t deter the best founders nor do they let the bumps along the way halt their progress. They have an almost fanatical belief that they will be successful, and this fire sustains them through the tough times. Success in any endeavour requires grit and perseverance, and entrepreneurship is no different. Founders need to lead by example… inspiring employees and exciting investors with their vision. Not every founder needs to be a charismatic genius, but they all need to believe strongly in what they are doing.
Closing remarks
The beauty about investing is that everyone has a different view. Ask 5 investors a question and you will probably get 6 answers. My aim was not to create some great source of knowledge, rather, to share thoughts which might resonate with founders at any stage on their journey. I hope this list was at least helpful to some, and I welcome any readers to challenge my ideas or get in touch for further discussion! Feel free to drop me a line at joseph@felixcap.com
About the Author: Joseph Pizzolato (JP) is an Investor at Felix Capital and Entrepreneur with 10+ years experience. He specialises in B2B software, Fintech and Consumer Internet businesses.
