5 insights into the investor-startup exchange: attitude, horizons, awareness

Startups get a lot of attention from the industry. Simple as that. They are the sexier, jazzier, more vulnerable babies that the media gets excited about, and investors want to nurture. However what happens to startups when they grow up? When they perhaps graduate from an incubation or acceleration programme and need to walk on their own? They still have a lot of growing up to do, yet there is an expectation that they should be fully-functional companies at that point. That expectation is ingrained into the industry, so much so, that even the entrepreneurs themselves start to believe it.

Grindstone, a new acceleration programme launched by growth equity fund manager Knife Capital, is designed for more mature, post-revenue companies — not a girl startups, not yet a woman autonomous profit-driving companies. The programme kicked off last Thursday with a “disrupted” Demo-Day that saw investors pitching to companies. What it brought to light is the precarious relationship between the investor (of all kinds) and entrepreneur (of all sorts). I’ve picked out some of the more interesting points raised at the launch that might help entrepreneurs understand that investors are human too, and point out some cardinal sins along the way.

Lack of awareness

There were 50 companies selected for the first stage of Grindstone. At the launch, co-founder Andrea Böhmert revealed that during the selection process they asked fellow investors for companies they felt were not doing as well as they could be at that stage of their lifecycle. Upon approaching the CEOs of said companies and explaining what Grindstone was, the reaction was one of, ‘that’s a fantastic idea! I can recommend some companies to you.” To which, of course, Grindstone’s response was, “no no, you are the company we are approaching.”

This lack of awareness from the entrepreneurs about the current state of their own company really stood out to Böhmert and her team. Just because a company is profitable, or covering its costs, does not mean it is doing as well as it can, or should be. Complacency does not result in job creation. Investors want to know how entrepreneurs are thinking of increasing profits, it’s not good enough to have your head above water, you actually need to learn to swim.

A clear vision… for the money

A video call with IBM VC Martin Kelly, from Ireland, revealed much about the nature of the international funding scene. As a corporate VC — who invests in other VCs — Kelly shared some candid insights. Funding is not for everyone, and he insists that you need to interrogate whether you really need it… but he advocates that funding is particularly useful with distribution and branding. This is especially true if you plan on going international, and need help with scaling up production. One thing entrepreneurs can do is give some thought to what they need funding for (production, distribution, marketing et al), before approaching potential investors. Investors don’t want vagueness, and they will respond well to your clear vision.

Who’s valuating who?

It goes without saying, but valuation depends on whether you are buying or selling. Knife Capital’s Keet Van Zyl warns that you need to be wary of consultants whose job it is to help companies up their valuation. This is not a truism of all consultants, but many will artificially inflate your valuation to serve their own needs, and appear like they have done a good job. When asking a VC, for example, for funding they will evaluate the risk-return on their investment. If they need to valuate your company to determine those factors you can bet your bottom dollar that they will value your company at the amount that ensures their investment makes sense.

Angels got attitude

During a panel discussion with Angel investors Sean Emery (Rainfin, Titan Investments), Vuyo Radebe (Gnosis Investments) and Brett Commaille (AngelHub), Emery raised an interesting point about attitude.

When approaching an Angel investor for money, entrepreneurs have to keep risk in mind. Angels traditionally invest in the earlier stages of a company’s lifecycle, and thereby take on more risk. If you come in with an attitude of, “we want this amount, with X salary and Y benefits,” but only have a proof of concept (and not a proven sustainable business), the Angel might be less than enthusiastic towards you. You need to be able to prove something, and if your company or business model can’t prove it, then you have to… with your attitude. If you aren’t willing to risk something like comfort, then why should that Angel risk their money?

Investment horizons

As van Zyl highlighted at the launch, one thing to keep in mind when approaching an investor and when seeking out valuation is investment horizons. On paper VCs look at a three to five-year investment horizon, but in reality that might be closer to being between five and seven years. When assessing risk they will determine their return over say two years versus five years versus seven years, and work out the optimum time to exit. Angels, for example, look to get five to ten times their initial investment, whichever works out to be the better deal for them. ie. five times their money in four years is not as good as ten times in six years.