When I start a company, I’m driven to innovate to make positive change at scale. So, when it comes to investing in start-ups, similar things interest me. So, I won’t really look at, say, a coffee shop – even it serves really quite incredible coffee – but if a start-up can in theory improve a billion people’s lives, then you have my attention.
I’ve seen both sides of start-ups multiple times, from raising money to investing capital. I successfully founded, raised capital for and sold two start-ups to FTSE 100 companies, and subsequently invested in 11 startups with some incredible results, including Super Awesome, which sold last year to Fortnite maker, Epic Games.
My experiences have shown me where things can go right and wrong.
So I’ve worked out a list of six key questions that are effective in helping me decide whether to invest in a start-up. I hope they help you in your quest for investment.
#1 – Do I have an exceptional understanding and belief in what your long-term goals are?
Peter Thiel, the Paypal founder and early investor in Facebook said that “the best entrepreneurs have a definitive view about the future and plan for it”. He said this after Mark Zuckerberg declined Yahoo’s $1bn offer to buy Facebook. One of just two early investors in the company at this point, Thiel argued that Facebook should take the deal. But Zuckerberg said: “[Yahoo] had no definitive idea about the future. They did not properly value things that did not yet exist, so they were therefore undervaluing the business.”
I completely agree. Understanding the big idea, the vision and long-term goals are mission critical. If I was looking at two founders, with the same credentials, the one thing that would make them stand out would be their idea for the future.
I focus on how big their idea is. And then, of course I gauge how much it aligns with my own interests, so that I can work out how much passion and expertise (including network) I can invest and what impact I could make.
#2 – Do I have a solid relationship with the founder?
Many investors, particularly angel investors, want and expect to actively contribute their time to any venture in which they invest. From mentoring the founder, to serving on the board of directors, or taking a hands-on role, I like to get involved. A good working relationship is vital.
In my experience, people are more important than products when it comes to growing a business. And a government study confirms that’s empirically the case, too. In a fast-growth company where people are so committed and working so hard, emotions can run high and points of view can conflict about how to tackle inevitable bumps in the road. You really have to work for each other and support one another, so having a strong relationship with great communication is vital for success.
#3 – Will I move at the same pace as the founder?
For entrepreneurs, speed is one of the top priorities. It’s a quality founders look for in investors. But for VCs, for instance, speed is far less of a priority than the brand of their potential partner (note this factor isn’t really something founders look for in investors). Entrepreneurs want money yesterday to fund the next stage of growth. To be fair to VCs, it is hard to move as fast as the best entrepreneurs.
As much as founders want to get money into the business quickly, some early investors might be looking to get money out quicker than the founder would like. Thinking again about the Facebook/Yahoo example, where Peter Thiel wanted to cash out, Zuckerberg wanted to hold out for longer. Entrepreneurs and their investors need to be aligned on pace and trajectory from the outset to avoid disagreements down the road.
#4 – Are the rest of the management team on board and do they buy into the strategy?
There’s a funny story about Airbnb. Brian Chesky and Joe Gebbia, the two founders, had design backgrounds but had no prior managerial or business experience whatsoever. In fact, they were so untutored that they thought people referring to “angel” investors believed in celestial beings. Chesky remained CEO but hired a COO in Belinda Johnson. Along with the management team, she took the founders’ great vision and was instrumental in translating into a great company.
In my own experience, having a strong leadership team on board supporting the strategy is so vital. A founder can be spread too thin and have blind spots. When I was a founder/CEO, I hadn’t come from an academic background with advanced degrees and decades of experience making strategic decisions. I had simply run companies successfully straight out of school before co-founding a company with a novel idea and huge vision.
‘My business partner and I initially tried to keep too much control’
But my business partner and I initially tried to keep too much control. We scrimped on hires, had an inadequate team, and we lost crucial time. Realising our mistake, we relinquished some control, got investment and hired the highly experienced Tim Byrne, as CFO. It turned out to be an inspired move. We were young and starting our entrepreneurial journey. He was far more seasoned and used to doing massive, global deals. We were doing something new and future focused. Successfully on-boarding him and the rest of the team transformed our company’s fortunes.
Great companies are all about operational excellence and brilliant execution. The founder should really be able to demonstrate that her or his management team is 100 per cent invested in the strategy.
#5 – What is the founder’s relationship like with the management team?
A major predictor of a start-up’s success or failure is how potential team members mesh with the founder.
Cautionary tale? WeWork’s charismatic and visionary founder Adam Neumann’s chaotic lifestyle left colleagues upset and unwilling to support him going forward. For me, charisma and vision alone just won’t cut it.
Still, start-up CEOs can benefit from a more nuanced management team than a regular company.
As a serial founder/CEO, I recognise that other entrepreneurs have different needs than other CEOs. The management team that goes around them might not be the typical structure you get at a more traditional, academic-led company.
Founders who know what they don’t know, and hire to fill those gaps, are valuable. And those who have a great relationship with the management team they have hired are even more valuable.
#6 – Is everyone aligned with the vision?
Investors love amazing storytellers who can articulate a vision. But there’s an art to crafting a compelling vision for change. And it only becomes significant when everyone in the business is aligned with it.
I’m looking for leaders who can paint a vivid picture of an ideal future state, and who can emotionally engage the people who are being asked to implement it. The founder has to be mega clear about what people need to do to achieve it, and it should feel different from what any other company is doing.
Once the vision has widespread commitment within your company, it will be infectious and give another clear reason for investors to buy in.
David Newns is an entrepreneur, angel investor and chairman of fashion start-up Prevayl