As they develop their companies, founders must give consideration to the metric of investability. It’s a metric that is challenging to apply because the yardstick of measurement is human judgment. Judgment is complex, and we can understand it like other complex phenomena by breaking it down into parts and understanding how those parts relate to each other.
About ten years ago, Jamie Rhodes and I had the opportunity to combine his understanding of investment with my proficiency with modeling. Jamie is a tremendous resource for understanding this topic, as he is the founder of the Central Texas Angel Network and the Alliance of Texas Angel Networks, and a serial entrepreneur (check out his exciting company Sio-Tex ). The result is a blueprint that founders can follow to design for investability, and that they can use to revise their companies when investment doesn’t occur.
The blueprint is arranged as a hierarchy, inspired by Maslow’s Hierarchy of Needs. At the outset, Jamie and I brainstormed a number of parameters that were important to consider when making an investment decision. It turned out that while all were important, they could be ordered from more fundamental to less fundamental. Deficiencies in more fundamental levels makes the opportunity easier for an investor to dismiss. Less fundamental deficiencies are more apt to be addressable, and it’s here where a hands-on investor begins to see where they could add value.
Like any blueprint, it’s not a picture of a process, but of an outcome. It’s not chronological or developmental. Founders are free to design, redesign, develop, and build any part at any time.
The most important consideration for an investor is the motivation of the founders. After many years in school, people can be motivated to get paid rather than make money – it’s what public schooling was originally designed for – supplying the labor market. Founders need to be interested in obtaining returns from markets, not with getting rewarded by some authority for being innovative, working on a problem, or being right. The right motivation is evident when founders describe a compelling vision, and care enough about generating revenue to make it grow. It’s absent when founders want to be rewarded solely for their commitment to changing the world, or when they want to prove a point, or where the vision is banal.
Companies are made out of people, and savvy investors know this. In my experience, nearly every failing startup’s problems can be traced to team dysfunction. Again, the public school system was designed to recognize and reward individual merit, and so the virtuous ability to work with others is more rare than it might be.
We can further break down how teams work, in order to create another blueprint – I’ll cover that in more depth in a future article and replace this with a hyperlink. Teams work when the members are collaborative, and when three fundamental roles are addressed, with nothing neglected and with no overlap in responsibility that will create conflicts.
The roles concern themselves with answering questions: What is possible? What is needed? What can be delivered? What the company does is negotiated among the people answering these question.
Teams must also have an ability to communicate both internally and externally – a networking capacity – that means they can work among themselves and also work collaboratively with mentors, advisors, investors, and customers. None of us is as smart as all of us.
Investors want to know about the dialog between the founders and the markets. Markets are vast, oceanic, and ultimately mysterious, but we want our founders to have done more than stand on the shore or ride in a glass-bottomed boat. Market engagement means our founders have gotten wet. Like divers who have cut turtles loose from fishing nets, or removed fishhooks from the mouths of sharks, we want to hear real and moving stories of engagement and problem-solving.
Product (Not Just Technology)
“Everyone has a plan until they get punched in the mouth.” – Mike Tyson
Most technologists struggle with the placement of this element in the model. To them, it seems obvious that a tech startup’s foundation is technology. While these individuals may succeed at getting grant funding, investors have different criteria than grantmakers (although that difference is shrinking), and a lack of discernment here means a lack of investment.
It’s worth noting that technologies never enter markets – only products. Investors want to see that the technology has been productized through collaboration with customers. An easy way to see that this hasn’t happened is when founders pitch the many possibilities of their platform technology. Discerning investors will see in this the unmanaged risk of creating a viable product.
Position (Not Just IP)
Investors want to see intellectual property rights strategy, but this is not as simple as just checking the “patent pending” box. What they more fundamentally want is to see a positioning strategy: how the company will establish and protect a position in the marketplace. Certainly, obtaining patent rights is a way to position your company on the innovation landscape, but more importantly founders need to be able to explain why this opportunity is their opportunity and no one else’s.
Patent rights are a negative right, a right to exclude others. They are analogous to real estate property rights, the right to prevent trespass. Other ways to keep the competition off of your turf include but are not limited to: establishing exclusive supply arrangements or exclusive distribution agreements; establishing joint development relationships; building in-house know-how that is hard to replicate or reverse engineer; maintaining trade secrets; and controlling source code.
Convincing Yourself, Convincing Others
Once you internalize this blueprint, you can use it as an investor to refine and guide your inquiry. As a founder, you can use it to think like an investor yourself – and you owe it to yourself to do this, since just by being a founder you are investing things in your company that are far more precious. And as a founder, this blueprint can help you understand feedback from an investor and have a better dialog that could lead to making changes that will make your company better.
I often ask founders, how do you know if your company is any good? Many will point to the quality of their technology, their business plan, or the importance of the problem they are solving. But really, it’s not enough for founders to decide their company is good.
If you are fundraising, you are in the market for investment. The bottom line answer to whether your company is any good is that the market will agree with you; no amount of convincing yourself will take the place of also convincing others. You have to agree, and this blueprint will help you do that.