What Investors Look for Before Putting Money Into a Startup
by Larry Kim
If you’ve ever pitched your startup to investors, you know how hard it is (and if not, you soon will). Investors are looking for unicorns – companies they believe will become profitable and sustainable in the long-term.
Most VC pitches fail. This happens because investors aren’t just investing in ideas. They’re investing in the person (or people) behind that great idea.
To increase your funding chances, it helps to get inside the minds of your potential investors. This post will help you do just that.
Meet Parul Singh. She is a principal at Founder Collective, a VC firm based in Cambridge, Massachusetts.
Singh was kind enough to recently answer a few questions about what investors look for before investing. Check out her great tips and advice.
What red flags do you look for as an investor when someone pitches you?
I am always watching for customer and market orientation. If someone is enamored of their product but have a “if I build it, they will come” attitude, I don’t think that works.
The only red flag for me is arrogance. It’s a fine line. You have to believe you can build something that never existed before, so there is a certain arrogance or confidence needed for that that. But you also have to deal with a lot of (sometimes negative) feedback coming from the market and be able to reorient yourself, so if you’re too inflexible to take input, that’s a bad sign.
What’s the craziest or most ridiculous pitch you’ve seen?
My favorite in my first few months here was a company that was shipping stuff to the moon. Literally, taking satellites and science experiments and sending them into space. Fortunately, in VC boredom is not an option.
What’s the best piece of advice an investor (or a potential investor) ever gave you?
Ultimately that it’s all about execution. My colleague David Frankel says this frequently, and it really is true. Even if you have a mind-blowing idea in an exciting market space (we call these use cases), how your team executes on it is what makes the difference between a $25 million, $250 million, and $2.5 billion startup.
What’s the best piece of advice you ever gave to an entrepreneur?
I frequently tell entrepreneurs to bootstrap as long as they can to preserve ownership and optionality. And never to fall into the trap of thinking you can go it alone – you rarely can build a valuable company without the right people around you.
What types of questions should entrepreneurs expect to hear from you?
Why did you start this company? Understanding their inspiration and personal connection to their business helps me get a sense for what makes that founder tick. We also place a high value on founder-market fit.
Do you have any regrets on companies you chose not to invest in?
We can only invest in companies that give us a sense of conviction. Sometimes we meet really incredible entrepreneurs but lack conviction about some aspect of their business or how they’re addressing the market. This doesn’t make them bad, it just means we’re not the right investors.
I want everyone to succeed, especially the founders I meet who are putting their everything into what they’re building. I definitely know what that feels like. Ultimately, we select companies we feel we can add the most value to.
What was your proudest moment as an entrepreneur?
It was getting a check from our first customer, which happened to be Teach for America, which was a big deal for us, because we made an awesome product for teachers.
Also, when teachers really got what we were doing or sent us notes thanking us. That was pretty awesome. I was also incredibly proud of my team. So there were many proud moments!
What was your proudest moment as a VC?
When we backed the first company I spent significant time on, which we ended up investing in. It’s a Montreal startup called Workjam, which makes it easier for hourly employees to manage their shifts and stay in touch with coworkers, while keeping their personal cell phone number private.
If you’ve read about how tough it is for hourly workers, especially parents, this could have a really big impact. Also, the team is seriously impressive and I learned a ton from the process of getting to know them, which is really the best thing to happen with when we work with a founding team.
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