Good news: it is becoming increasingly easier for entrepreneurs to access the necessary capital and get their companies going. Resources such as AngelList help bring together founders and investors, and the passing of the JOBS Act will help early-stage companies access crowdfunding. There is a fundamental reshaping of the venture capital business going on, in a way that is great for entrepreneurs. Nonetheless, the top VC firms still see hundreds or even thousands of pitches, and most remain unaware of the goings-on behind the scenes. The capital is available, so the real secret of how to get VC funding just becomes a matter of knowing what makes startups appealing to top investors, or why instead they fail.
To answer some of these questions, the book Venture Capitalists at Work, co-written by Tarang and Sheetal Shah, provides real insight for entrepreneurs as to how top investors evaluate, invest, and then mentor their startups. The book, presented in interview format, allows entrepreneurs some insight into the thought process of various hot shots in the VC world. The three essential questions this book seeks to answer are: Why do most startups fail, and what can be learned from this? What is the secret of the startups that succeed? And finally, what are the main things that VCs need to identify to fund a startup?
Before listing the crucial characteristics a successful startup needs, Shah addresses several common misconceptions. The main one here is that startups most often fail because they can’t raise funding, or at least not enough. Shah believes that a lack of funding does not cause failure, but is instead a by product. The problems start when startups do not hit key performance metrics, and mismanaged, out-of-sync, or poorly developed operational categories (product, finances, business model, consumer team).
Secondly, Shah also feels that many believe the best entrepreneurs only search for funding when they need to, and only the required amount. Instead, Shah says the best entrepreneurs are constantly fundraising and search for more than they need, to avoid the need to fundraise at inopportune moments.
Thirdly, another myth is that is is always best to, whenever possible, construct your business without venture capital, or only as little as possible. Instead, Shah believes that, overall, there are few high tech models that allow for successful long-term bootstrapping in today’s competitive market. For him, “the best companies use funding to scale rapidly and own the market… it’s not a tradeoff.”
With these myths addressed, Shah then goes through his “Five Must-Know Facts for Entrepreneurs.”
Big, Bold Ideas
Shah explains that VCs really love bold, big, beautiful ideas. Entrepreneurs should not be afraid, because often those risky ideas are often the ones that people believe in the most and draw the attention of investors. Furthermore, big ideas give founders more wiggle room in order to overcome short-term failures.
Authenticity, Integrity, and Motivation
For Shah, the traits that matter the most for successful entrepreneurs are authenticity, integrity, and motivation. In terms of integrity, while confidence is important, so is the ability to admit weaknesses, and to surround yourself with a smart team that can leverage their strengths. For motivation, a genuine desire for solving a problem for the customers is also extremely appealing to VCs, and not solely those just looking for the next billion-dollar company. Finally, authenticity refers to going beyond the basic pre-launch market analysis, and instead having a hard-won deep experience in the market. An informed product view requires familiarity with both the market and target customer, and this understanding often separates those who succeed and those who fail.
For Shah, one of the most commonly overlooked parts of the process is the importance of the first ten to twelve hires. These employees are critical to determining a company’s “cultural DNA.” Instead of looking to hire people who can be molded to become the right fit, early employees should be able to make a difference straight away and hit the ground running. Integrity also plays an important role here: the first stages of a startup are difficult, and you need people with the same passions who are convinced by your character to join and stay on when things are tough. Unit cohesion and team culture are crucial for successful founding teams. Although competition with major names to recruit young talent is difficult, successful founders can find unconventional ways to get the top talent, effectively wield the aforementioned “integrity” aspect, and sell their big idea.
Objectivity and Adaptability
These two are fundamental traits that the Shah brothers see as barometers for success. Entrepreneurs need to be passionately disinterested as well as brutally honest for anything that matters. They need to seek the truth, and at the same time not be predisposed to what they may find out. They must be willing to change directions quickly, even if it means throwing away long hours that may have been spent on that one route.
Rapid Iterations and Pivoting
Finally, it remains essential for founding teams to constantly iterate on product ideas, pivoting until finally finding the ideal product-market fit. While there should be a big goal in mind that you constantly focus on, you must also remain flexible and willing to pivot and change approaches until reaching the right solution. Often, failures come to those unwilling to adapt from the original solution. Instagram, Groupon, and Facebook are just a few examples of companies that adapted from previous, less successful versions.
In conclusion, it is not solely about the business model. While obviously important, VCs also are intrigued by how you tell your story. They want to know the full plan, see that you understand the core problem, and have a subtle and deep understanding of what the customers really need. Entrepreneurs need to pitch a workable structure from which the business can iterate and adapt until the correct solution materializes. High levels of understanding and preparedness provide the maneuverability that make you and your team appealing to investors.
The book Venture Capitalists at Work has this and much more great insight, as well as dozens of success stories that undoubtedly can provide useful material for fledgling startups. The book is available both in print as well as eBook form here.