A few days ago, I shared a link that allowed people send me anonymous messages. The truth is that some of the people who sent their thoughts have never met me in person or worked closely with me. There were however indicators on which they based their assumptions. For example,
- I had a serious face when they saw me in passing, therefore I must be unfriendly.
- They never saw me at crowded events, therefore I must be antisocial.
- I am ~6’1" when the global height average for women is 5’4", therefore I must be intimidating or unapproachable.
- I frequently posted tech startup related content and they had heard of me therefore I must be smart.
- Someone said he thought I was rude, no evidence or reason, it was just what he thought.
Thoughts, sentiments, intuition and second-hand gist. When does evidence and first-hand experience come into the equation?
We subconsciously apply the same assumption strategy to startups.
“X recently raised $abcM, therefore they have a great business model and anyone who hasn’t raised as much will fail.”
“Y has joined A startup, therefore they will succeed.”
“Z startup has won awards therefore their idea is valid and scalable.”
Sole focus on externals means that I can bluff anyone to submission — if I choose to.
Fundraising and increasing valuations have become de facto indicators of a tech startup’s financial wellness, growth and future success. Valuations determine if you are a unicorn, decacorn, hectocorn or not. Undisclosed amounts and your firm is shrouded in mystery. High and it is assumed you are thriving. Low or not growing astronomically and it’s assumed you are bound to crash and burn.
Over-optimistic initial valuations can turn unicorns into unicorpses.
A Tale of Startups
The story of Theranos is one that is overflogged but reminds us of the importance of due diligence and the inevitable consequences that come when we don’t pay attention. Even though the company raised $700M (some sources quote >$1.1B — Yes, 1.1B American Dollars) at a peak valuation of $9B, it failed because the product did not work.
E-scooter startup Unicorn and Token, a startup that presold payment rings for $249 back in 2017 were plagued by the same problem — non-delivery of products. Unicorn’s CEO in an email wrote “We are so, so very sorry.” He attributed the company’s failure to loan repayments and covering marketing and advertising (Facebook ads) costs which left little for production and deliveries of the scooters which were ordered at $699 a pop.
Monitor monthly burn rates anyone?
At the core of (ad)venture capital, investors want to turn a profit.
If you watch the Series Bull, S4E2 opens up with founder Whitney Holland pitching her water desalination technology to an investor audience. She promises that they are working to scale the technology to cater to municipalities. She ends the pitch with “my tech team tells me we are only 90 days away” and then proceeds to drink water filtered during the live product demo ON STAGE. The investors never stood a chance. They were in.
The next scene shows an exchange with her CPO/CTO (later turned whistleblower) who asks why she has promised investors 90 days when they both know the technology wasn’t likely to scale to promised volumes in maybe 90 years. She tries to wave off his concerns saying it is the stress talking and asks what new gizmo or talent he needs her to get to make it happen. He responds by saying, “you keep taking people’s money, promising them the moon and I’m supposed to be your Neil Armstrong and give it to them and I’m telling you I can’t.”
Not every problem can be solved simply by adding enthusiasm.
What I love about the Skully co-founders is that they were on the same page albeit the wrong one. Don’t know the story?
Does anybody monitor anything once the cash is in?
This “bad boy” collaboration was absent with Roadstar.ai. In what is probably the saddest startup story I’ve ever read, 1 of 3 co-founders allegedly received kickbacks during fundraising, deliberately hid code (bear in mind this was a self-driving start-up) and falsified records. The CEO and CTO fired him but in a crazy turn of events, the investors fought back stating that Zhou — Chief Scientist was fired without their consent and letting him go would be detrimental to the interests of the company. Next, the board “discharged” the CEO and replaced him with CTO. Of course by now, investors simply wanted out. By March 30, they were looking for new acquirers after procedures to dissolve the company were initiated and a $90M investment fund was frozen. Current valuation is less than 0.1 what it used to be. They had so much potential but alas.
In crypto startup Wala’s story, sources told CoinDesk that the CEO allegedly spent funds from 2017’s $1.2 million initial coin offering (ICO) on travel, a posh office space and expensive equipment. According to them, the company also lacked a revenue model and quickly expended resources.
Everyone’s looking for an easy way to grow, but there’s no shortcut for solid business principles.” — Anonymous
Move fast and break things? I think not.
Pre-Investment Due Diligence (DD)
1. Run independent DD. That X just invested in Y startup or A referred B to you doesn’t make them foolproof.
2. Have your own investment criteria.
3. Voice out issues you may have with the deal or founder to your team — even if everyone else thinks you are crazy. Even when the concern isn’t a deal breaker, it helps your team know what to be ready for. Best case scenario, you get to say “I told you so.” Worst case, maybe you are crazy. Sometimes all you have is intuition — get proof to back it up.
Analysts and Associates, speak up.
Tools of Titans touches on how Marc Andreessen and Ben Horowitz beat up each other’s ideas in front of newer hires. This encourages newer hires to talk about possible pitfalls they see as well.
Post-Investment “DD” (More Due Diligence)
Man up when you discover fundamental flaws eg a product that isn’t working or cannot work at scale, a revenue model destroyed by new government policies, co-founders running amok with exotic automobiles, women and luxury accommodation on company dime.
- Are they fulfilling orders? See Token, Unicorn
- Are they hitting predefined milestones?
- Is money unaccounted for?
- Are they having issues with customer acquisition? Building distribution networks?
And more importantly, how can you help?
I would also find a mass migration of talent or key personnel interesting. According to Business Insider, CFO, Henry Mosley was fired from Theranos after asking questions about the reliability of the tech and the honesty of the company in November 2006. Theranos went on for the next decade without a CFO. How this was not a red flag for a company valued at $10B is beyond me.
“The billion dollar SaaS company I joined is a ticking time bomb of technical debt. We can barely ship anything. The CTO sugarcoats the situation to the CEO, clients and investors. If only someone thought to ask the engineers…”
“Big companies do surprisingly little due diligence when making $100M+ acquisitions. They often regret mere weeks after the acquisition closes when they realise they can’t reuse any of the software, the business is a lot less solid than it seemed, and the talent a lot less talented.”
Bring more than Financial Capital to the table
In case you’ve forgotten, you have skin in this game. The only way you hit it big is if one or more of your portfolio companies exceed expectations. What good is your network if you can’t make asks that give your PCs a better chance at survival?
Building a company is hard. Sometimes all that founder needs is for you to check on them. Remember how you felt when your (rich) parents never showed up for Open Day, PTA or Visiting Day? Yeah. Unfortunately as a parent, the only way you know that your child fell ill or is having issues in school is by showing up and asking questions.
Every time a founder tells me that an investor is giving them close marking after investment, I laugh. Some term requests for investor updates as micromanaging and I follow up by asking if they can leave someone to run a business with $10K or $50K and never ask “how far?”
Especially for first-time founders without any corporate or operational experience, if we are being honest, you aren’t 100% sure what you are doing. Please don’t refuse the help. So…
Put your investors to work
- Your investors have networks that can open doors. If they don’t, they probably shouldn’t be on your cap table — especially if you are a Nigerian startup. Make asks. After all, they are sorta your employees. Remember, every opportunity that you are looking for is a person. Don’t be shy to run non-equity/sales deals with them also.
2. Always take the call.
3. Drop the attitude — you’re really not as smart as you think.
Draw up periodic investor reports
This is for your startup as much as it is for your investors. Be as honest as you can. Again, investors are in this as much as you are. You won’t know how well or poorly you are doing until you draw up that doc. For early stage companies, monthly is best. You can always drill in when producing internal docs.
Keep up with the numbers
You will experiment a lot as a startup and monitoring metrics will help you measure success, failure, growth or decline. Are you using data to your advantage? Are you using it to build a smarter product, service, feature?
“For every metric, there should be another ‘paired’ metric that addresses adverse consequences of the first metric.”
- Andy Grove
Have a product that works
This goes without saying.
Have defined pathways to profit.
Stop building companies that twerk for investors. Are you just “growing and expanding” or building a sustainable business. If your only USP is freebies, discounts or lower transaction fees — CBN recently gave us all a Christmas hamper here, what is the plan because this is just a market penetration strategy and Uber teaches us this lesson everyday.
View yourself and your startup through the eyes of a stranger
Are you building a company that you would consider acquirable?
I honestly believe that we are in a tech VC bubble that will inevitably burst. The ones that will be left standing are the ones that have hacked sustainable, profitable and transparent growth.