The Three Key Factors that Make Your Early Stage Company Investable, in Order

I was about to go into the most important meeting of my life. If they liked what I had to say, these people would invest millions of dollars into my company. I already had one investor in my corner and was practicing my presentation in front of him in the conference room while we waited for the others. As I nervously muddled through all the carefully calculated numbers and facts on my slides, he stopped me and said, “There are only three things that matter to us, in order. Take care of these and we are behind you.”. Here are those three factors:

1.) The Founding Team

The team is the MOST important value factor for an early (pre-series-a) stage company. At this point, although you have made some progress with your company, you likely have not gotten far enough to intrinsically value your company. You are asking people to invest their dollars based of your assumptions, ability to execute, and perhaps some positive early indicators. That is a big leap of faith to ask of anyone. Ultimately, the success or failure of the venture will depend on you, the founder(s). So, the question to ask is how comfortable is the investor trusting you to solve the problem at hand. Are you yourself investible? The most important concept I will get across in this post is that when you go to pitch, you are selling yourself, not your company. You can model, forecast, and explain until you are blue in the face, but no one will invest in you until you have successfully sold yourself.

So, what makes a founder investable and, in turn, successful?

Strength of Character (four traits stand out in particular):

Good Ethic: Investors must trust you to be a responsible partner and steward of their capital. This means doing what you say, being transparent about the company’s struggles and successes, and always acting in a manner that is in the best interest of the company and stakeholders. This may seem like a given but it is a requisite that not all meet.

Grit: I cannot overstate the importance of grit in a founder. Resolve in the face of adversity and resolute determination to succeed is attractive and exciting to any investor. You better be willing to run through walls and bust down any door to make your company a success.

Durability: Taking an outside investment is a whole other level of commitment and pressure. An investor might ask herself, “Can this founder sustain for the long haul? Can they be consistent and reliable to stay on mission in the face of all the downs and ups that will test them continually over an extended period of time?

Coachable: Founders need to be willing to accept help and receive constructive criticism well. Being too hard-headed when the company obviously needs to pivot or adjust in some way can lead to serious conflict that can sink a company. Founders will need to grow as their company grows and stay flexible. For example, early on in my career an investor in my company once challenged, “You are a great do-er, but now you need to learn to be a great delegator.”

Experience:

You may have a great idea, but do you have experience or expertise in the field you are entering? Have you started and scaled a company before? Quite often it’s the founder’s unique knowledge, skill, and expertise that makes the difference between success and failure. If you do not necessarily have these, that means a rough learning curve that you will have to get up quickly with tough lessons to learn, and at the expense of the investor’s dollars. This means less efficiency in iterating and proving the model. If you lack qualification, this may be making your potential investors hesitate. However, it’s is not a deal breaker if the investor sees intelligence and a keen eagerness to learn what you need to be successful.

Commitment Level:

This goes back to grit and durability. The simple question is, “How committed are you?” For instance, a friend of mine once came to me asking for feedback on his business idea for which he was seeking funding. After he told me what it was I asked why he wanted to do it. His response was “I don’t know, just a way to make some cash on the side”. This is obviously not what any investor wants to hear and will likely lead to a bad outcome if pursued. I told him not to do it.

When the going gets tough will your turn tail or rise to the occasion and fight your way through it? Many times, the answer lies in your founder story. How important is the problem you are trying to fix, to you? Solving a painful problem that you or a loved one experienced yourself, as opposed to capitalizing on an impersonal business idea, is a strong indicator of uncommon commitment. A poignant founder story is the most powerful tool in your arsenal.

Leadership and Vision:

Any way you slice it the founder will be the leader and flag-bearer for their company. As such, potential investors want to know if you are the type of person that people will be able to rally around. You are the person that has to shine the light for all stakeholders involved, from employees and customers to board members and investors.

2.) The Market

Do you really know your market? You should because it is critically important to the attractiveness of your company. Typically, institutional capital wants to see a “B”, as in billion, in market size. You will have more flexibility in this area with angel investors or if other market factors are enticing.

Here are a few additional market factors that investors will consider:

· Growth rate — How fast is your industry growing annually. Is it growing at all?

· Disruption level — Is your industry rapidly changing/evolving through technological advancement or some other catalyst that is creating opportunity? (i.e. Fintech and crypo-currency)

· Competitive Environment — How saturated is your market with competitors? Are market leaders already established? How will you differentiate? On which segment of the market will you focus?

· Maturity — What stage of maturity is your market in now? Every market follows the same growth curve: Innovator, early adopter, main stream, late adopter, mature. The farther along this curve the more saturated and commoditized the market becomes. (i.e. memory chips, flash drives, etc.)

· Trending — Is your industry abuzz in the public eye. Will new legislation open up up-tapped opportunity? Is it the popular thing for companies to consider investing in to stay on the cutting edge? (i.e. telehealth, AI, blockchain, Marijuana, etc.)

· Exit Multiples — More sophisticated investors will look at exit revenue/profit multiples of comparable companies to measure potential return on investment.

3.) The Product

The solution you are bringing to the table to solve the problem is, of course, a natural consideration. Investors aren’t necessarily concerned with how far along you are in developing your solution, rather, they want to know what the impact will be on the stakeholder(s). Are you solving a real problem that creates value? Look hard at your product and consider if you are a ‘me too’ company following the pack or if you are truly disrupting the status quo. Put another way, what are you doing that no one else is doing or can do as good as you? How defensible is that competitive advantage?

Ranking the Investibility Factors

Now let’s talk about why these three key factors are not equal. Let’s keep it simple with the scenarios below:

The bottom line is that the Team, Market, and Product are all highly important to the success of your company and most heavily weighted factors for a potential investor. Its best to have all three in spades, but it can still be a good opportunity if you are strong in two of the three areas and one of those two is your team.