When you’re building a startup, inevitably (and hopefully) you get your business and your product to a stage where you’re ready to start entertaining investment outside of the early “friends and family” rounds of raising capital. Whether it’s via a member of the Network of Angel Organizations of Ontario, a more federally focused agency such as Atlantic Canada Opportunities Agency, or a private venture capital firm like Brightspark VC or Information Venture Partners, there’s agreement across the board that what it takes to impress any potential investor is a founder or group of co-founders who have "done their homework." But what does that look like in reality? Here are some examples of what to do (and what not to do) to put you in good stead when courting investors, as shared by a number of different people in the Canadian investment community.
A startup that was building a solution in a market that is overwhelmingly dominated by women (to the tune of 76%) was asked why they didn’t have any women represented on their management team or advisory board. Instead of recognizing the obvious gap, one of the co-founders instead made a joke about one of his male colleagues being the “eye candy.”
"It was a mistake on so many levels,” said Randall Howard, of Verdexus, "but fundamentally what it showed was that there was a male-dominated management team that was playing in a female-dominated vertical, and instead of taking responsibility for not being there yet, or thanking the person for the observation, they made a joke, and a poor one at that."
No one founder or team of co-founders are expected to know everything, so investors learn a great deal about you by whom you choose to surround yourself with. If you are a 20-something trying to sell solutions to a senior demographic, then you need to ensure that you’re listening to a variety of advisors who can speak to that demographic. Are you born and raised in North America with no global market experience? Then you need to ensure that you connect with people who have that global experience and cultural insight from abroad. It doesn’t just stop at your advisors, though. If you’re an engineer, have you built your management team with partners who are strong in marketing, product management, finances or whatever else may not be your strong suit?
Quinn Lawson, Community Manager of Brightspark VC, said that when an entrepreneur brushes off or fails to follow up on observations from a potential investor, then that’s a sign that they’re uncoachable, a big red flag.
Know Your Market, Your Product, and Your Plan
Each person who shared their insights has been approached with the “Hey, I have a good idea!” or “Wouldn’t it be cool if...?” conversation openers. That’s not how to impress an investor. All agreed that it becomes pretty evident, pretty quickly, which entrepreneurs know their stuff, inside and out. Being highly focused, anticipating questions that investors may have before they are asked, having good credentials, possessing deep domain knowledge, knowing your financials (even if they’re outsourced) and obtaining a key network of advisors and/or mentors: these are all key considerations that an investor looks at when making a decision to back an entrepreneur.
When Quinn was asked what Brightspark looks for when they’re considering investing with a startup team, he said that they look for entrepreneurs who are "sleeping, eating, and breathing the industry that they’re involved with, and that they show the ability to capitalize on the shortcomings of those industries.”
David Billson, President & CEO of Ellipsis Digital and Engine SevenFour, noted that he looks at those entrepreneurs who have invested a lot of their own time and effort in their startup. “Time is the better indicator,” he said. “Cash is an infinitely replaceable resource; time is not."
“"I'm asking for a million bucks, because it was a good round number, and I need to up sales and marketing" isn’t necessarily a good answer, but "I’m going to hire four salespeople in these key markets, and they’re going to deliver this much in revenue and that’s going to lead me to this point in my business"—a much better answer.”
Know Your Investor
It seems like simple sales 101, but if you don’t know who you’re asking for investment from, then you’re doing it wrong. Kerri Golden, CFO & Partner, Information Venture Partners wants to remind entrepreneurs to look into who they’re talking to, rather than just doing the “spray and pray” approach. In other words, know your VC.
What’s the investor's current portfolio? Where does their expertise lie? Do they invest in startups that are building in the enterprise/SaaS space? Then perhaps your consumer-facing product isn’t the right fit.
Kerri further encourages entrepreneurs to reach out to other entrepreneurs that the investor has worked with. What’s their experience? What can they tell you about working with that investor? Is it culturally a right fit? All of these questions are important considerations when you’re establishing and entering into potentially long-term and mutually beneficial relationships.
Angel investors and venture capitalists can have vastly different expectations when it comes to working alongside a startup that they’ve chosen to invest in, so their level of involvement with your startup will also vary.
David Billson noted as well that just like Toronto real estate, “location, location, location” can greatly affect your opportunity to secure funding.
“There’s not a lot of risk capital available right now in Canada,” he said. “When the federal and provincial governments are the largest investor in Canada, that says something. Knowing your community and their risk profile is going to serve you better in the long run, because that’ll help you focus your efforts where you’ll be most successful. The Kitchener-Waterloo area is a bit of an anomaly as there is a lot of risk capital from spin-offs from RIM and OpenText; definitely different from London, Ontario or other secondary markets that do not benefit from tech-savvy investors.”
So just as it is with each part of running a startup, engaging with potential investors the right way takes a lot of behind-the-scenes work. Knowing your strengths, your weaknesses, and your current gaps is a sign of a healthy entrepreneur. Having a plan to capitalize on those strengths, and shore up those weaknesses and gaps is the sign of a smart entrepreneur.