M25 Motorway, photo by Ian Britton

A story about entrepreneurs I want to invest in, without even listening to their pitch.

It is fascinating to look at teams at the beginning of their path. Let me share with you a story that happened to me recently.


A story of Palleter

I am Managing Partner of Innovation Nest — an early stage European VC firm focused on B2B software. Marcin Szeląg from the team of Innovation Nest found Palleter, a company from Estonia, to invest in.

Palleter wanted to solve the problem of empty trucks crossing Europe back and forth. When we talked with the company we became more and more attracted and made a decision to invest. In the three main areas where investors evaluate companies, they scored good or very good:

  • Market — the market for Palleter was big or, the better way to put it, really big.
  • Product — the product was not there yet but the approach of founders convinced us that it would be software and data that would solve the problem that was challenged for decades.
  • Team — the team was convincing — focused, efficient and well prepared.

Though they were early, the story was compelling. They were an iconic example of a startup: there was a problem on big market, there was a radical new approach based on software and data, and it was proposed by digitally minded entrepreneurs.

We were happy to see such people in Europe. Their fundraising was going very well. In total, there were commitments for €1m.

We discussed documents with the company and we were waiting for the final version of them. Three weeks passed and we started to ask how the legal work progress. We waited for another week and then:

Bang

The founders of Palleter told us:

We are sorry but we will not go ahead with the round and in fact we will not continue with the company.
For a simple reason: we were working to confirm specific hypotheses that are fundamental for our business and the results were negative. There is no sense to continue as our product will not bring the value we expected. We were chasing the wrong market.

The story told by founders can be found here.

It has never happened to me before: astonishment and respect were my first reactions. It took a while when I came to a conclusion — I want to invest in these guys even before listening to their next pitch.

4 ingredients to make a good cocktail

Why do I want to invest in such guys? Because I think that it is likely that they will make a difference and will build a big company.

Our very brief experience with them shows that they mastered 4 ingredients necessary to make a good cocktail to feed a future unicorn.

Think big

Sometimes it comes in with a flavor of hackers’ culture: the believe that software and data may solve most difficult problems. Sometimes the big vision is a follow-up of gut feeling or a desire to face an existing big problem.

Sometimes the big vision comes through thorough analysis of trends and industries. Whatever. A convincing big vision gives a good frame to build a business.

The classical VC model

To build big company one will need financing. Not always but in most cases the company will need several rounds of financing.

Therefore the classical venture capital model, invented and tested in Silicon Valley and spread around the world from there, makes sure that the financial structure and governance is geared to growth and success:

  • Founders are executive directors and they run the company. With each round their stake in the company diminishes but thanks to the market potential and investments the value of their shares grow faster than without investments.
  • There are many investors in the company — spreading risk and collecting added value make sense. Investors have very broad rights but their decisions are made by majority voting.
  • All shareholders — founders, team members and investors — are aligned and work towards one goal. It is not control that matters but growth.

Each company is different but respecting existing financing patterns makes growth and financing easier.

Focus, testing, MVP and all of that

Entrepreneurs worked out good practices how to build companies.

  • Iterations of hypotheses and tests.
  • Start small, focus, find Product-Market-Fit and scale fast afterwards.

As I wrote above each company is different but respecting good practices such as those above increases chances for success and build trust with investors.

Pro-active and ethical

Building startups is not a game of control, it is a game of growth. Therefore founders have to have two features: they have to be hyper-active and they have to be ethical. If either is missing, it will not work.

Homage to Palleter team

The Palleter team did all of the above perfectly. They had a big vision, they structured the company and funding in a way that was geared for smooth growth, they set hypotheses and methodically checked whether they worked and, last but not least, there was passion, perseverance and integrity in the way they worked.

They failed with this business, because the market was not there but I make a bet that if they keep trying they will build a great and big company.

Therefore I want to invest in them even before listening to their next pitch.