A plan, passion, and conviction are the major qualities an investor seeks, according to Starfish Ventures partner Tony Glenning.
He says entrepreneurs become accountable when they accept investment, which is designed to test assumptions.
“Every investor is going to ask you: are you going to work hard? Are you going to make this happen? They want to see in the whites of your eyes that you really mean it because you are taking on responsibility, there’s no two ways about it.”
This primarily centres on the company plan, a prophecy of sorts.
Before any papers are signed, the entrepreneur and venture capital investor will hash out a five-year plan, with quarterly goals.
For example, the salespeople need to follow up on 20 leads a day and convert five of those leads.
To assemble the big picture, it extrapolates these details – such as staff costs, revenue generators, marketing spend, lead generation and conversion – to predict the cashflow and capital expenditure.
The business plan measures the performance and it’s possible to see results within the first six to 12 months.
For this reason Starfish partners are actively involved in the business, Glenning states unequivocally. They will usually meet the CEO at least once a week, in addition to monthly board meetings, and quarterly updates.
“We would say this is an advantage, not a disadvantage,” he said, and added he hopes the Starfish portfolio companies would agree.
“If a founder doesn’t want people involved in their business, then don’t go to venture capital.”
It was a similar situation for Adioso co-founder Tom Howard, whose “ecstasy” of the first investment – $15,000 to join the Y Combinator accelerator program – was quickly overwhelmed by the pragmatic reality that they had to find a way to make money from their intuitive flight booking search engine.
The Y Combinator stake was succeeded months later by a $70,000 investment from five YC connected angels; and a year later, another group of angels, including Gmail founder Paul Bucheit, invested $350,000.
Each subsequent investment brought less cause for celebration, and more concerns about how to pay the bills.
“Each new raising just buys you some more time to keep trying to make the business successful,” Howard says.
With a war chest at the ready in 2010, Howard devised one major criteria to govern the spend: it must produce intrinsically valuable technology assets.
“As long as we ended up with an asset that could be sold for more than the amount of funding we’d raised, then we’d be in a strong position, even if we ran out of cash.”
The pair would in fact suffer that less than a year later, in early 2011, when, in a panic, they violated their own “product-first” rule.
Their product wasn’t ready for general use but they used a chunk of capital earmarked for development to advertise Adioso.
It was their biggest mistake. Don’t panic, he thought.
They survived week-to-week by whatever means possible, investment from friends, freelance gigs, partnerships, and even the R&D tax incentive.
The pair, friends for over a decade, used the free time to contemplate their commitment to their chosen path. Eventually, the inspired vision and fresh hires attracted more investors that kept the dream alive.
Bailey and Howard had no regrets. They realised wastage on wrong hires, wrong features, and aimless marketing is a part of the learning curve for an early stage start-up that aims to create a new paradigm.
As Adioso gears up to raise the next round of investment, the pair aim to achieve the YC formula: a 5% weekly increase in key metrics will create an attractive investment proposition.
1. Rebekah Campbell’s start-up priorities: product-market fit; team and culture; and investment.
2. The business plan is a schedule of milestones to hit after you raise investment. Get it right the first time.
3. Venture capital are active investors.
4. Funds should be used to produce intrinsically valuable technology assets.
5. Y Combinator advises that a 5% weekly growth rate in your key metrics will position you well for investment, according to Tom Howard.
