Sorting the Investable from the Detestable
Every founder knows raising seed money is hard — there is no getting around it. You’ll meet with 50 smart VCs and angels and get 50 different answers. Some love your company and want in right away. Some give you that second-best outcome — the “quick no.” Many pick and pull at different aspects they want to change, hemming and hawing at “maybe this” or “if only you had that.” It’s certainly incredibly frustrating as a founder, but it’s also very difficult for the investor. This is primarily due to inherent difficulties in evaluating startups: there is an enormous degree of subjectivity involved in judging seed-stage companies.
Take two of the smartest, most experienced and successful seed investors, put them in separate rooms with the same investable seed-stage pitch and ask for their feedback. The only thing you can guarantee is that their thoughts will be significantly different from one another — similar to how the only thing you can guarantee about a startup’s financial projections is that they are wrong. After a startup reaches that high bar of investable, the dearth of available objective information forces investors to guess how well the startup will do. And their guesses will usually be all over the place.
It’s easy for most other experienced investors to quickly and politely reject the startups that are not investable. On the other hand, we can easily spend weeks agonizing over compelling startups. There will always be indecision (and I’m not here to outline the best criteria and process), however, M25 Group has been continuously improving our decision-making system to maximize the objective information we do have available. This formula has vastly improved the speed and quality of the way in which we reject companies. Even founders have noticed the efficiency of our operation. Here I’ve outlined a few tips to make this process slightly less painful for all parties involved:
- Process: Investors should know what they look for and how they will make a yes/no decision — and then stick to that process. Founders have to plan how they manage and track their potential investors through the entire round.
- Communication: Investors need to inform the founders of their decision-making process and update them as they make their way through the funnel. Founders should keep their potential investors informed of crucial updates.
- Preparation: Investors should be efficient and only take meetings with startups that meet some basic requirements. Founders should do their research to know which investors align with their goals and come to meetings armed with as much relevant information as possible.
For founders who believe they’ve already passed the “investable hurdle”, let’s talk about what your company should look like at the seed stage* to know if it is worth raising capital yet:
Have you done anything?
There’s a whole host of founders out there trying to pitch investors before they’ve really done anything. They have a great idea — but that’s where it stops. They’re still working their W2 job, or are in grad school, but they haven’t taken any initiative yet. Maybe they’ve been able to put together a really snazzy pitch deck, but it’s clear they haven’t spent anywhere near the amount of time or effort other seed-stage founders have. If you haven’t jumped in headfirst, you’re not in the seed stage — you’ve only dipped your big toe but you’re stalling to dive in. I get it — the water’s cold — but it’s not getting any warmer…
Put some skin in the game
In order to get a product built and in the market (a seed-stage requirement), you’ve really got to invest in it. That means what you think it means — plowing tens of thousands of your own money while you bootstrap and build the product. If you don’t have money, you’ll have to get your friends’ and families’ (or win some pitch competitions, or get into a pre-seed accelerator). In general, you have to risk it all before you’re able to convince investors to risk some.
Launch in the market
So you’ve built a great product? According to who? Real users, real revenue, and real contracts signal to the investor that it’s not just you who likes this product. Real use cases don’t just prove out market acceptance, they also help make your product better, which is absolutely crucial in the seed stage.
Build a company with a logical risk/reward ratio
If you want to start a coffee shop, hair salon or any other “traditional” business, angel/venture capital is not right for you. Instead you should go to your personal savings/credit, local banks and friends/family. A venture-backed business requires a large payout in a relatively short amount of time — otherwise investors wouldn’t take the risk. Traditional businesses have a similarly high likelihood of failure but a fraction of the reward, and are therefore not appetizing to any angels/VCs.
Make sure you’ve got the basics of what investors look for
A solid, well-rounded team (preferably with relevant experience); an innovative opportunity in a big market; and a compelling product providing real value — these are a few of the basics you’ll be graded on, and if there’s a huge hole you likely won’t be investable.
Even though much of what I’ve touched on here is subjective (and there will always be the exception to the rule), as a whole, these minimums — though challenging — are required to convince somebody you don’t know to give you money. And then there will still be a wide range of responses for even the most qualified of seed-stage companies.
*I’m writing this from my experience with the Midwestern startup ecosystem. I’ve heard some incredible stories of what gets funded in Silicon Valley, many which are probably not “investable” in the Midwest.
About the Author
Victor Gutwein is the managing director of M25 Group, a micro-VC firm he started with his family in 2015. M25 Group’s focus is on seed and Series A rounds for Midwestern startups. He has worked in corporate retail in both the fashion and ecommerce industries in a wide variety of cross-functional experiences, from marketing to merchandising, international to omnichannelretailing. Victor has a passionate history with startups, including a vending machine business and kick scooter company, along with being on the board of the University of Chicago’s first student-run venture fund.
Victor lives with his wife on the South Side of Chicago and loves staying active with backpacking, water polo, rugby, ultramarathons, and triathlons. If he can’t convince you to workout with him though, he’ll usually succeed in getting you to try out a Euro-style board game (like Settlers of Catan) with his friends.