5 Types of Teams That Attract Investment

“We invest in people not ideas.”

VCs , especially those investing in pre seed or seed stage, look for a certain type of management team to de risk their investments. They believe there are few characteristics that early teams have that will make them more successful than most. From conversations and my observations, here’s what I believe are the 5 types of teams that vcs get excited about making it rain on  backing financially.

The A Team

They’ve done this before, they’ve built valuable companies and exited somehow. Whenever this group gets together, magic happens, predictable and wonderful magic happens. This next start-up they are working on may be super challenging to understand, or in an industry that has yet to be disrupted because of heavy gunned incumbents. A team with 3 or 4 notches under their belt are rare to find but when they are up to something, people get excited.

Team Credentials are Us

While most investors like to say they are apathetic to job and school credentials….Its an instinctive thin slicing gets your ears up when someone says they are ex-Google, ex-Goldman Sachs, Dartmouth Alum (not talking about anyone particularly) They’ve done what was required to get to those companies and schools and that means that they’ll do what it takes to make their idea work. It may also mean they have the connections for human and financial capital where others don’t.

Team We Lived This

They understand the problem they are trying to solve because they lived it. They worked in the industry, they know the customers, and they know the nuances to turn their idea into a valuable company. They have market knowledge that only insiders have and they have easier than usual access to their first customers.

Team Apollo

All rookies have to start from somewhere but this team has proven to be something special early on. They’ve either acquired accolades, established great traction with customers and press, or they’ve developed game changing service or product that people are excited about. They may not have the experience to know what they are on to, but investors are interested to see where they go with extra support.

Team Phoenix

Like rising from the ashes of failure, there are teams that will come together from a failed business and have it figured out. They have the collective experience and combined discipline to hit gold with their new venture.  

Closing Thoughts

Granted, the best teams have a combination of these teams mentioned previously, but I think as a start-up team, you should have a good understanding of your strengths and weaknesses as a team because the company becomes a reflection of its management team, especially in the early days.

What type of team have you assembled?

What’s in a Deal Memo?

I originally wrote this as a response to a comment. Long story short, when a vc firm is making a decision on whether to invest or not, and they’ve had meetings with your team. They normally make a deal memo to specify the opportunity and explain the pros and cons of the investment. This document helps partners and others on the investment team communicate clearly about the opportunity. 

  1. Executive Summary

10k view of the opportunity. Something I would read briefly the first time around to get good context but be definitely asking more.

a. Quick business summary: Background on the company, who they are…where they operate, etc

b. Investment analysis: To invest or not to invest… that is the question…more importantly, why on either side?

c. Risks: What are key challenges the company faces? Team…competition… technology risk?

d. Financing: Round, size, amount already invested

e. Post investment: Use of funds, milestones etc

2. Market Opportunity

Goal of this section is to better understand the market and figure out where the opportunity fits in the grand scheme of things.

a. Key Problem: what is the company trying to solve for?

b. UVP: What is the solution to the problem?

c. Market: How large is the market? Where is the market in its maturity?

d. Competition: Identify current competitors and how company fits into the mix.

  • ***I like to add information about current customers here. The positioning depends on which of the points the customer interviews support. Ref calls can also be added in product space as well

3. Product 

Goal here is to paint a picture of the product and the teams ability to defend and improve said product.

a. Product Description: What is the product and who does it serve?

b. Price and scale analysis: What are the cost drivers? What are the margins? How do they reach more customers.

c. Product Roadmap: What features are coming online in the next 18 months? Why?

d. Defense: What are the key deterrents to ward off competitors. (Good opportunity to talk about IP)

e. Challenges: What are some issues with the current product? How is the company dealing with those issues? (customer interviews are good here too)

4. Marketing/Sales Strategy

Goal of this section is to get the hard nums on how they plan to reach their customers.

a. Customer Story: (borrowed from ad world) I want to create representation of who the customer (person making the purchasing decision) so we normally create in depth stories (sometimes ends up being longer than it should but meh..) Who are they? Where does company go to reach them. What are their restraints, and what does the product empower them to do?

a1. What are the similarities of customers? For example, in b2b…Do the customers have the same size company in terms of people/revenue/geographic operation?

b. Nums: Cost of acquisition, variance between channels, sales cycle…etc

c. How do you scale the Sales and Marketing Strategy? (strategic partnerships, bd)

5. Team

a. Who is on the team? (everyone…including board of advisors)

b. What are their key strengths?

c. What are their key gaps?

d. What areas will need to be added as the company expands?

6. Operational Strategy

a.Use of Funds: Where is the investment going to? Which milestones/ goals will the investment be funding?

b. Historical financials (most early stage companies may not have this but still worth identifying.

c. Monthly Burn Rate: Some like quarterly but I like to identify monthly burn pre and post investment.

d. Revenue targets & Margins

7. Deal Structure

a. Current cap table pre investment — ->Cap table post investment

b. type of security

c. Any other information from previous rounds that might be pertinent

8. Exit

Gets into details of who the potential acquires are, what an IPO may look like, and who to compare it to.

9.Le Fin

*****Things normally added to the appendix are other supporting documents, due diligence findings, and full customer interviews.

 Pretty exhaustive, but I feel as if i’m forgetting something. This should get the job done for most seed stage deals.

On Fundraising

Had the holidays so I took a break…. This week is the Bola special. It’s dedicated to fundraising like a boss.

For those who don’t want to read everything, here are the 4 takeaways on how to fundraise. I will most likely go super granular on each part in the future.

  1. Know why you need to fundraise
  2. Know who you’re fundraising from
  3. Have your fundraising game plan and have your end game in mind
  4. ABC. Always Be Closing

Know why you need to fundraise

Most founders will say they need to fundraise because they need money. While for many, that’s always the case, sometimes cutting cost, going after a more attainable growth trajectory, or eating what you kill (customer driven growth) is a better option. The metric most used to identify what needs to be spent is milestones. From there, understand how much each milestone will cost the company (people, time, $$$). Understanding milestones and use of funds along with market comparables will ensure you’re in a better decision to identify whether you need to fundraise or not and will also make your justification to family and friends, angels, and vcs sound more persuasive.

Know who you’re fundraising from

When I engage venture capital firms or angels, I try to know as much as I can about them…. How long have they been in existence? Who have they invested in? What is their thesis? Who are the key decision makers? What is it like to have them as an investor? Founders need to approach investment as if your hiring. You want to do as much due diligence on the investors you’re interested in as they will on you.

It’s also important to start the investment conversation before you need money. You’ll get a chance to “date” the investor a little bit and see if there is a fit. Also, they’ll get to date you and see if there’s interest. I normally advise reaching out and developing/creating these relationships 6-8 months before you need to fundraise.

I know the most common question after the last two paragraphs is “Where do I get all this information from?” Well, I’m glad you asked. The first place to start is to look at your networks. Who do you know and who do your friends know? I often start with all my friends in business school, law school or people I met at investment conferences. From there, I can get warm intros. If I don’t know anyone or need to know more information about their firm, I usually start with their website. Hopefully, you’ll see their investment thesis, portfolio companies and partners. From there, you can use LinkedIn, CrunchBase, Mattermark (sign up for a free trial and get information on all the investors you need…don’t tell them I told you that though.) or other platforms like VC4Africa, Angel List, Pitchbook (very expensive, find someone in the private equity industry who has access)

There are three strategies I’ve seen from founders raising capital for their company,

  • Make as much noise as possible through marketing and PR that potential investors will come talk to you (seldom effective but works.)
  • Research and develop a target list based on investment profile (geography, size, stage, industry) and reach out via warm intros.
  • Get an email list of potential investors and send (cold emails).

I’m sure most people have use a combination of all three.

Have a realistic perspective on how long and how much effort it takes to fundraise

Once you’ve made the decision to fundraise, you’ve got to develop a fundraising plan. You should understand and document the following:

  • How much you’re fundraising, valuation, terms, and how you intend to use the funds.
  • The type of investors you’re going after and clip you’re accepting
  • A real timeline: when you’re starting, when you intend to close, and when you really intend to close
  • How you’re going to reach out to investors… Communication strategy, relationship building and how you’re going to gain access to them

In putting your plan together, be realistic about how long the process will take. There’s one company I’m working with now and it’s taken 9 months to finally get the company into fundraising mode. Sometimes crafting the narrative is more than just words, it means acquiring the right customers, bringing on the right team members, or evaluating a new business model.

ABC. Always be Closing

In fundraising mode, those who are focused on it (should not be the whole organization, will take away from operations) should be focused on driving activities which will get interested parties down the funnel. I believe fundraising is essentially like sales for your company but to a different customer and product. Every activity should be tracked to bringing people more information to get an investment decision. This doesn’t give you the license to be entitled and pushy, but it does allow you the opportunity to be realistic and upfront to investors where you are in the process (to a certain extent…will follow up on a negotiations post)

Don’t half step

To conclude, fundraising is a skill and expertise that is essential to any company. You must learn how to go through it and how to be successful. To do that, you’ve got to be fully committed. An alternative way to think about fundraising is encapsulated in a saying I heard in my previous experience at Fortify VC, “The best investor is the customer.” You’d be really surprised but sometimes, customers are willing to bend over or pay for the idea of a problem being fixed. I know business models can vary but getting customers to pay ahead to create value is something which has been around for a long time. That’s a conversation for another day.

Toolkit

Here’s an example of an excel sheet I use to track engagement. Some of you may be fancy and have a crm to do this for you.

https://docs.google.com/spreadsheets/d/1ghPJOUGlD95oEQV_tq8QYYgiSouCQilnXEwB8UvmLaY/edit?usp=sharing

I use mixmax to track my emails and create templates for broad distribution.

I just got hip to a new investor crm/manager that looks cool. I smell a clone opportunity for African markets (writes down in idea notebook) https://foundersuite.com/

Re-thinking Venture Capital in Emerging Markets

For the last year or so, the team at tiphub has done a lot of interesting research and testing to identify key needs to accelerate entrepreneurship in emerging markets like Nigeria. One of the most common challenges, as most would assume, is access to capital. However, speak to VCs and they say they don’t see enough invest-able companies and are constantly fighting for the best opportunities with other vcs.
There seems to be a deeper disconnect that we haven’t been able to capture. In the next couple of paragraphs, I’ll discuss the actual amount of money in the VC space in Nigeria. (Nigeria will be our case study) Identify where I believe they key gaps are, and present a viable solution that will be the catalyst for start-up funding at scale.

Based on a triangulated estimate, there’s about 300 million USD under vc management in Nigeria. This does not include foreign based funds that operate in Nigeria.  To better put this in perspective, we took GDP/ VC asset ratio to give some context. Its relatively easy to see that Nigeria is lagging in vc capital as an available asset class.  This isn’t the only issue. If we look at how 3oo million USD is deployed year after year, we’ll see that most vc firms look to invest in later stages in lifecycles of most start-ups. This translates into entrepreneurs who need to prove viability and scalability before investment. However, its the chicken or the egg argument. How do companies prove the validity of an idea without funding?

There’s an abundance of growth captial in Nigeria. The key issue is the lack of early stage “market validation” capital needed to get companies off the ground. In more developed markets, entrepreneurs find early capital from the three f’s (Friends, Family and Fools). There are also more opportunities for funding through banks and government grants. Family members are willing to bet on the next big idea.  Ultimately, entrepreneurs in developed markets have access to a diversified stream of capital that 1. is at a smaller amount 2. Friendlier terms and capital structures for young companies.

The key gap, as I see it, is access to friends and family capital in emerging markets. At its core, it stems from lack of access to credit and disposable income in rising and emerging markets. This is the real gap. Early stage companies don’t have the capital to fund their first MVP or to validate their market. As a result, many ideas never get tested in the market.

VCs won’t dare touch risky early stage opportunities due to the demand for returns. There’s not enough disposable capital in emerging markets to make a dent in funding for start-ups. How do we create a bridge from pre-seed to growth stage?

In the ideal world, VCs would partner with foundation and governments to fund small scale experiments/ projects. These projects would either fail or succeed and would move to a scaling phase. For example, if we took Nigeria as a case study, the Nigerian government would match $100 million USD with the Elumelu Foundation’s TEEP program focused more on grants to validate….lets say… 2000 ideas. After a year, 400 (20%) of those companies would be invest able opportunities. 400 is a decent pipeline. Key issue here is sustainability. 200 million dollars a year to identify 400 invest able companies is a tall order. However, 100 million dollars  a year vs  the cost of unemployment  in a place like Nigeria seems like a drop in the bucket.

Maybe later, we can also talk about ways to jump start merger and acquisition activity so people see the light at the end of their investment

Key points to remember:

  1. There’s a lot of money in emerging markets.
  2. The key to differentiation in the early stages of a company is what they’ve learned vs their competitors. Cashflow and other financial indicators don’t start to matter until the later stage.
  3. Entrepreneurs need flexible and attainable early stage capital to validate their ideas.
  4. Private/Public partnerships have to find a way to work together to create the bridge for early stage companies.

Random statistic to leave you with: Nigeria ranks 170 out of 189 for raising finance for a business and 129th (up 9 places since 2014) in starting a business.