Why is your past experience of being in a company alone will not matter for a startup fundraising strategy?
The "Startup Founding Team" is one of the characteristics that early-stage founders frequently ignore while also being one that VCs frequently thoroughly scrutinize. Surprisingly, data from Pitchworks of 100+ SaaS startups with whom we worked in the last five years clearly demonstrates that more than 80% believe that having a big idea and vision is sufficient to secure funding from a VC or an angel investor.
We have already seen how 90% of early-stage VC evaluates a startup
The Market & Time to Market
The Founding Team
Revenue / Product Market Fit
Business model
Ideal & Big Vision
The correct idea and the appropriate vision won't make any difference in your pitch until you have the right time, the right market, a fantastic founding team, and of course, PMF backing it. If you take a closer look at the aforementioned criteria, the founder's mindset and ability to turn the tables for the VC have both been demonstrated in a number of situations, and venture capital data support these observations. "60% of the startup failure is due to the founding team."
Glitch to Slack: Showcase of great Founder: VC relationship Here is the greatest example of how a founder establishing trust with VCs can turn out, the name is "Slack" now but back then in 2010 it was called Glitch. 2010: Stewart Butterfield announced his new venture Tiny Speck raised $5 Million in Series A funding from Accel Partners and Andreessen Horowitz. They proposed to create a game "Glitch" a massively multiplayer online role-playing game. 2011: Another $10.7 million from the same investors and their business model claimed to break even at 100,000 active users, but the game again reversed to beta mode due to its development issues. 2012: They re-released the game again but unfortunately, the promise did not happen, they were not able to attract enough users, the same year Butterfield announced The death of Glitch. 2013: Same year they started productising an internal tool"Searchable Log of All Communication and Knowledge" also called SLACK, it was a tool they developed to help their own team collaborate with each other during the game development stage. Butterfield felt he should pursue the internal tool to market rather than the game.
The startup would have been written off as per the VC rulebook, imagine burning 16.5 million from the investor's side yet Accel Partners and Andreessen Horowitz again trusted the same team and founder in 2014 when they came up with Slack. Stewart Butterfield and team raised closer to 43 million which became the best exit for the A16Z and Accel. Losing money is nothing new to VCs, how you lose it and to whom you lose it matters, the second time when Butterfield went he knew what they were going to ask him and he had the convocation about the growth and command over the business. If the A16Z had taken the historical just quantitative data-driven path that books and history have thought us, Butterfield still would have raised but it would have been missed opportunity for investors.
How can you as Founders showcase conviction? The short answer to this is"convictions can not be made up or templated into slides, it's inbound honesty". Though there are ranking systems followed by top funds to rate the founders, the judgments of a conviction are still a grey area, it's not a perfectly laid out rule. There is no clear-cut standard device for how one can quantify conviction or passion, but this evaluation happens within the VC table in the most invisible manner and various factors do influence it. We are talking about people's metrics, its variables and judgment are not really set in stone, some of the data points may be collected subconsciously from various discussions they had with you, or some may come from observations during the due-diligence process and discussed over a period of time between LP, GP, MP, and Analysts. We have listed out a few criteria a founder should consider in order to prepare at a mental level before the process starts.
#1 EXPERTISE IN DOMAIN & PROBLEM SPACE 42 % of startups fail because there is no market need 14 % because they ignore customers 13 % because the product mistimed
In the SaaS world, the problem has to be much more well-defined, unlike consumer changing behavior in terms of B2C products, there are no drastic behavior or technology changes disrupting often but what problem it's solving and to whom it's solving is very important.
There are two types of founder lead companies.
a) Product solving founder problem: Developers trying to solve engineering problems, one marketing & CTO co-founders trying to solve CAC issues in marketing, having subject matter experts who have been there done the job as a user and as a buyer for the long run is a big value add. This builds accountability and having a strong say in what you are going to build, no need to source for contacts to test product-market fit and less effort in building the initial community. b) Product solving other industry problems: When founders are building a solution where they are not the users or buyers not part of the industry, then it requires much more deep research and understanding and context building especially if it's in the early stage. There are some brilliant founders who have done this in the past, but it's not an easy win from a VC angle. If you are fresh blood, yet you show conviction in the problem space, by either interviewing 100+ users and customers or building a community of potential customers you are gonna sell and you have a well-defined problem statement and an ICP, you already have a tick here. Usually, Malcolm Gladwell's 10000 rule is applied when the founder has 10 + years of combined experince in the domain as a user or customer, and facing customer problems then you have the VCs on your waitlist. The cost of the goods sold can be reduced at an early stage with the founder's expertise or in SaaS world it is mandatory to have a tech expert who can do hands-on code, at the same time having just tech founders only on the team is gonna be questioned.
#2 PAST TRACK RECORD
According to the Bengaluru innovation Report 2019: “Fifty-two percent of founders in Bengaluru have more than 10 years of experience while starting up, pointing to a trend of increasing participation in the ecosystem of a more experienced workforce.” But what's more important here is from where did you gain those 15 years, spending 25 years in corporate environments is less likely to make an impact in a dynamic startup environment, adapting to the failing culture, and bouncing back. For example, a founder coming from 20 years of sales background selling large enterprise products will have to unlearn and rethink selling the same product as a startup to other startups, the ICP itself is different and the nature of the animal he/ she is trying to sell is very more complex, in past, he/ she would have the advantage of process people and the brand set, here everything is from the scratch.
That being said, founders from
a) Previous startup exits.
b) Previous startup founding or core team.
c) Previously wore several hats or willing to wear that.
d) Founders with failed startup experience.
All the above get a double tick here when you introduce the team to the investors.
For a later stage through capital investment, the leadership team and the process can solve the problems and mitigate the growth risks, but at an early stage at a rudimentary level do you have funder the working and mental capacity of a startup? This is exactly what you are being evaluated against.
Another important facet of track record is also the school and university you are from determines your ease of fundraising. VCs coming from Wartons, IITs, IIMs, and LSE fund alumni of the above schools and universities. This is where the flow fund is totally struck within a small niche, try to have advisors ad non-executive directors from these schools if possible. More people who believe in your idea are only you who added credit to the pitch.
#3 ABILITY TO EXECUTE
As they say, "it all comes to execution and workload management"
Great ideas get killed with bad execution, average ideas excel with great execution.
Siliconyall has brilliantly listed out 5 ways in which a saas business could fail in execution, We from Pitchworks have our own execution failure reasons which we have seen from the founders we have worked with a) Undervaluing solution b) Selling to everyone c) Not having the ability to sell d) Not having the ability to support and push customers to success e) Not able to manage compnay funds in the proper direction f) Not able to sustain or pivot
g) Not having the ability to predict where things could go wrong and have a mitigation plan. If you see it's not about possessing the knowledge or experience, but it's about applying the insights to execute things that can move the needle from 0 to 1. Reading books or listening to podcasts alone cannot help in the entrepreneurship journey but the right action put on the most important value items will help your startup. A good example of this is how Intercom's founding team coming from only design & engineering backgrounds: Eoghan McCabe, Des Traynor, Ciaran Lee, and David Barrett, took charge of various roles within the company and they executed it brilliantly
#4 INTEGRITY AND TRUST.
This topic of discussion happens mainly at the VC partner's meeting, where LPs, GP, and analysts discuss the integrity of the founder only when there is something fishy and one of the key members sensed it. The initial pep talks you have had with them are not just random warmup sessions.
Make sure you don't a) Contradict with data points b) Forcast a number that is not realistic c) Illustrate stories for the sake of convincing the deal d) Project Non-realistic roadmaps and milestones
You have to understand this is not a sales deal, a customer could get convinced with just your solution but VC funds are investing huge money in you and your team, most VC teams have ex-founders, they could easily see through your fudged data points and most of them invest only in sectors where they have done enough research and have already collected founders' market reality reports. VCs appreciate honesty and I have seen VCs invest just in the ability of founders to execute + integrity alone. It's easy to be a friendly VC when the firm is in the limelight in an early stage getting all the attractions and revenue but when a compnay is facing challenges, what's the role of the Investor there is the question, for that to be the positive side you need to true to your word and count the actual sentences coming out of your mouth. Look at What Nick Grouf talks about Intellectual Integrity
What he is looking for is people who are a) team who is transparent. b) Ask for help, if he/ she screwed it up. c) Being honest and at the same time taking responsibility.
It doesn't matters if you don't know things but, if you are someone who doesn't want to accept what you don't know, then it might be a problem in the longer run. I see companies like Postman where all the founding team are engineers building products for engineers yet they have understood their own strengths and always been transparent with their VCs on their knowhows, and their challenges very openly. They have transformed over a period of time and I think any founders can be coachable with the right attitude, so the takeaway is to be open and talk only about what you know.
#5 HISTORY OF WORKING TOGETHER It doesn't matter how many years you know your co-founders, it can be your sibling, childhood friend, or spouse too, but what VC needs to know is if have you worked together in the past.
3 is the magic number on early-stage fundraising but if you are having a spouse as a co-founder you may have to re-think your vows, VC investment data clearly proves that married founders have troubles either with the 3rd co-founder or the business or the marriage in the longer run.
What matters here is 1 Long-term professional relationship delivering great products in past. 2 Gel together and face the world of problems. 3 Backing and trusting each other back for the long run. Here is a brilliant video by Garry Tan who is a designer and investor founder and partner at initialized which talks about founder conflict
We have seen friends fight and co-founder fight harder, but why and what they are fighting for makes the difference. On a personal note, I have seen great companies get shattered because of ego and trust issues between founders, I have worked with a couple of founders and it was not a great experience for me or between them. According to initialized, they find co-founders leave the compnay because of the following reasons. Imagine VCs position investing millions on a business and two founders don't want to talk to each other due to ego issues.
I know Rocketlane raised $18 million in funding, for me it was not a surprise at all for they have a great product for onboarding, I have also seen them work on Freshworks when they managed fresh chat together.
#6 Mutual respect & Cohesiveness. Ultimately investor knows they are investing in high-risk component and the chances of success are bleak, still they want to make sure they don't want to lose money due to mistakes which is been happening for ages. Integrity, History of working together, and how well you know co-founders are ways in which they can clarify they are not entering a relationship that is about to break or the founders are not aware they are about to break. Few founders are not compatible with each other, the early they find out it's better for the business.
Some of the VCs also have Management tests or psychometric tests which are a series of questions that you have to take independently or on par with your co-founders. Some founders find it amusing but the reality is when they take it, they realize how little they knew about their partner they are about travel for the next 7+ years.
The list of questions, compiled by Arthur Lipper, former editor of Ventur magazine, So when one of the co-founders contradicts the other, there are red flags and there are areas to work on, there are a few areas where they have to discover each other, Here are some of the questions I have faced as a founder from the VCs.
are a) Under what circumstances did you meet your co-founder? Need-based or long-time friends or event-based, Mostly short-lived blind dates are just made for the pitches
b) What was the nature and quality of the relationship? Professional only, Personal + Professional, Personal only until now Longterm professional relationships succeed in everything
c) What bad things can you tell me about Your cofounder’s performance under pressure? Handles it or kind of delegates it or is too expressive New immature co-founders each other them in this section
d) Does your co-founder seem to pursue stressful or comfortable situations? can you describe an incident? Stressfull incidents denote both have been in tough times together and they are bound to stick together at least some tangible time
e) How does your co-founder handle failure or situations that both of you did not foresee? If only they were together on failed circumstances, success alone does not tell about the relationship
f) Can you think of anyone who might question his/her integrity? This will mostly be a diplomatic answer but VC, he or she can re-question this after a year or years.
g) Do you know any people who dislike or have disagreements with the co-founder? This allows the opportunity to come out from the cloud that the other person is always right. i) If you had an opportunity to invest, alone or with others, in a business to be managed and possibly controlled by a co-founder, would you invest? If the relationship is new always one gets a very positive answer, as the relationship is mature one gets a very neutral or constructive answer
j) What are the best things or strongest points you can tell me about from the perspective of a future partner or investor? Usually, the expected answer is also a revelation in the turmoil of questions asked in the past.
k) Have you thought about 2nd line of leadership to your co-founder, do you have some names? This helps keep the plan be options rolling are the founders being realistic is also the question
We recommend taking up management tester first internally as a team rather than directly before VC asks you to take one.
#7 SELF-AWARENESS
The bi-product of the management test is the founder either conflicting or realizing how the partner thinks of themselves. This is hard but very important is to realize where they stand in eyes of others. An alternative to it is being self-aware all the time. Knowing your strengths and weakness as an individual and as a team.
Even though most people believe they are self-aware, only 10%—15% of the people we studied actually fit the criteria. -HBR
The way leaders are in a company kind of gets to the bottom of the funnel of employees who look up to them, so the culture of criticism and self-awareness builds an open growing environment among the young team, Not stereotyping but we haven't seen the same happen with a startup with an average age of 50+ founder. Harward Business Review had given out resources in which one can map where they belong in terms of internal self-awareness
A smart investor with the right amount of experience can easily spot an ambitious but delusional founder, especially if they are dreaming big. In SaaS, world innovations do happen a lot of ground-breaking ideas do come by but those happen within the constraints of the B2D model. If it is really groundbreaking idea prove it with metrics, revenue, and customer vouching for it, or else don't talk about it. For example, Ai and ML are the buzzwords now but in reality, AIG and ASI are no way closer to implementation even for companies like Google, ANI is the way to go ahead in the next 10 years. If you are to present network effects as MOTE by watching consumer products as an example, be aware of how much of the market leaders in the same space have implemented or its part of their roadmap, its at least 10+ years ahead, and new SaaS products can't gather those data for the ML model to have it in initial 3-6 years, Be realistic and be aware of your skills and strengths, having a bigger vision is important but what's more important is having a realistic one.
#8 DIVERSE BACKGROUND OF EXPERTS
A survey of the educational qualifications of 179 founders at 100 startups by Jombay, a talent analytics firm, shows little correlation between the ranking of academic institutes, especially IITs, and the success of a startup.
In the seed or pre-seed stage startups aim to get the product market fit so complex org structure and OKRS won't be required, building MVP as quickly as possible and testing with customers, and getting the model validated won't require more than 5 to 10 employees. Typically the team works to validate the hypothesis/need and observe the traction.
How can a team full of only engineers solve real-world retail problems, how can just a couple of salespeople come down and solve a deep-tech problem, it is the convergence of different forces that VCs look for. It is not about great products or great salespeople, it is about the complete packaging
I have compiled a couple of Indian SaaS companies who have raised seed or raised seed to series -A within a year, look at the team composition 1:1 with engineering and another team, on the contrary, we also have a lot of teams come with great engineering team but the composition overtakes. #9 PASSIONATE ABOUT THE SPACE
You are about to spend another 7+ good years in the same space, there is a passionate founder but with restlessness, Few claim themselves to be serial entrepreneurs at the end of a year of running a company, what matters to VCs is whether are you committed to the space and the problem.
Pitchworks survey data shows us that 35% of founders want to try new businesses as plan B outside their venture. This mindset will dilute the focus of the founder on both their ventures and is not good for business from a VC angle.
Great success comes out of passion and constant work if you get bored in your early years and look for other areas where you can shine without making the existing setup strong then a VC fund is not the thing for you. Serial entrepreneurs are born out of giving one great success and repeating the same in consecutive ventures d not really parallel ones. At the early stage, you won't have time to think about your personal life and how can you think about another problem to solve. Being in the same space for a longer time and deriving value is the way to go ahead.
Below is the data complained about by my favorite blogger Sammy Abdullah
here is the link
SaaS companies take a long time, on median it took 10 years to IPO/exit since founding and 11 years on average. If we isolate only those companies that exited in 2019 or 2020, those companies took 11 years to exit on the median. So the truth is, you are going spend on average the next 10 years for a successful exit, make big money or have a complete retirement from the business. There is no shortcut to success, so make sure the space you choose doesn't bore you soon. You must be madly in love with the problem, just discipline alone can not make you travel on this journey in the longer run. So LP's wants to find out how passionate you are, and how much sacrifice are you ready to make success happen. I mean there is no metric for the passion that I am aware of but make sure you are honest to yourself about the business and let that honesty reflect in business talks
The ability of the founder to sacrifice anything and everything and to go beyond boundaries to achieve business success can not be easily judged in a couple of conversations but smart experience investors have their own way to see in between the lines and work patterns
Conclusion
Pitch decks are more than just a collection of slides, especially when a VC requests them. It's an artifact that allows them to make decisions and must be fine-tuned with information. The average VC team member reviews the pitch deck for less than two to three minutes while determining if to advance to discussion or not. It's more or less comparable to a resume, but for your entire company rather than just your product innovation. You can either set up a direct meeting with the investor through a known source, or you can go through cold email, In all cases, it's better to showcase your team in a way that perfectly matches the aforementioned requirements. All effective pitch decks contain numerous understated messages that can be worth two or three zoom calls. Your pitch deck should at the very least persuade potential investors to speak with you further.
If you don't have a team in place, first find the right set of people who can be part of your vision in your circle or your extended circle or in social media. There is no one-man show here; lone founders rarely receive funding. As we've discussed numerous times on our blog, you can't fake it until you make it because that checking is the exclusive job of venture capitalists. But as we've seen, just being aware of the VC's position causes founders' vision which again opens them to endless possibilities.
Here is the summery of the playbook
Here is an example of how some great teams showcased the core founding team/management team on a pitch deck
Happy Fundraising About Pitchworks
We at Pitchworkshelp B2B SaaS companies of all stages with their pitch deck and fundraising journey, we have already helped more than dozens of first-time SaaS founders to reach their fundraising goals and we have raised more than 150M in funding working with startups of all stages. We provide end-to-end services right from pitch deck to running a complete co-founder Campaign, Making your team VC-ready, to CEO Personal Branding. Book a free consulting session with us
Comments