Toad of Toad Hall Ventures, Inc.
Originally posted on InterimCEO.com on December 8, 2007.
Under pressure for quarterly growth with intrusive investor criticism, far too many top managements have ceased to think critically. Like Toad of Toad Hall they grasp the “new thing, ” all too often the “new thing” which seems to have made Company X grow down the road. From the “Dot Com Strategy” of the Web boom to the CDO’s of the real estate boom, the inevitable fallout undoes decades of real growth, real strategy and real thought. We see Toad’s enthusiasms from the Fortune 50 to the VC edge where yesterday’s biotech became tomorrow’s nano and now has returned to green expectations of clean energy. Nothing is ever so simple. Bricks and mortar did not go away; people still like to see people and goods and good service. Enron is history. Venturers discover that 25 years is a long time to wait out commerciability of product, whether it is the new killer app or the new killer nano. In the meantime, someone else develops new break throughs; graphene replaces nanotubes as the new edge material. C-teams rediscover risk and physical laws. As wind farms blanket ridges and stand out at sea, we find, unsurprisingly, that turbines break down early in the harsh environments of grit, salt and, well, the wind.
Don’t fall into the Toad trap. Weigh the latest fad against the foreseeable risks; don’t accept the latest received wisdom; forge prudently; follow on soberly.
© Copyright 2008 S. Caroline Schroder. All Rights Reserved.
What Do Start-Up Investors Want?
Well, a 10x, for one thing. The following factors would be adjusted according to start-up stage, that is, whether the start-up is a rank newcomer or has been formed around another existing business/IP or is even a slightly more mature start-up with a real financial performance record.
Key Factors Include:
1. Internally consistent business model.
2. Substantial existing market for goods or services, with assured potential for healthy growth of market. Clear luxury niche or clear volume niche.
3. Potential customers easy to unhook from existing competing goods or services; underserved potential customers (inadequate alternative products); and unserved potential customers.(no alternative products)
4. High barriers to entry into market by competitors or potential competitors. Secure IP optimal. Inventor cooperation critical.
5. Market clear of existing or potential critical economic, cultural, regulatory or other legal hurdles beyond background noise level.
6. Key start up talent with skill sets, integrity, commitment and perseverance necessary for success. Clean background checks, good individual and team records, and internal harmony are very important.
8. Reasonable financial performance to date with at least adequate accounting, controls, and record for reasonable burn rate and prudent investment in business (not Aeron chairs and not cars, houses or vacation villas abroad)
9. Ability to own adequate equity.
10. Equity not tied up in legal, team or other battles.
Bonus: Signed long-term contracts, one or more significant committed customers (depends on product and market), growing trend of repeat customers, growing IP pipeline, and financial touchstones such as positive cash flow, record of growing revenues, etc.
Contrary to popular belief, or wishful thinking, professional investors in start-up ventures are not gamblers and the hobbyist investors are not sugar daddies–“angel investor” is an unfortunate misnomer. Depending on their business background, belief in the start-up team, and their own knowledge of the start-up subsector and technology (high tech or low tech and even fashion tech), the seasoned or simply wise investor will consider a mix of 10 key factors. Each investor weights each factor somewhat differently, but it is important for the venturer to hit each of the 10.
For the venturer, this means realistic self-analysis; and in an often brutal business world (“highly competitive”), the venturer would do well to be brutal in self-analysis. Good self-analysis will reveal in which factors the venturer is weak and provide critical information for rebalancing, retooling or redirection. We have seen too many venturers plow forward into a start-up despite reports detailing a limited market for their product, non-existent barriers to entry, or futility of adequate ramp-up in time to meet profitable demand. They sink money, sweat, time and reputation into what was always a losing battle. Believe your research. If your research predicts failure, go do something else.
For the executive considering a venture as a next act after corporate life, it is well to have an independent advisor make a separate assessment of the executive. Corporate skills, resources and processes are several degrees of magnitude different from those of the venture world. For instance, a corporation might profitably plow ahead into a limited market merely to secure the niche for marketing purposes; a corporation might be so large as to make issues of entry barriers irrelevant because no one else could compete with their allocation of resources minimal to them but outsized to everyone else. Any corporation may suffer loss leaders simply to be in the market. The true venturer can’t. Think think ahead.