Author: Tom Koor

Tom Koor

Successful angel investors are focused on the exit.

Purpose of this article

This article has a two-fold purpose:

  • Help angel investors identify the exit questions and issues they need to consider when assessing potential angel investments and managing their exit.
  • Help founders understand what successful angel investors may be thinking regarding exits.

This article considers success to be the cash return the angels receives upon exit.  One of the key measures is IRR (Internal rate of return).

You may download a PDF of this article from:  https://koorandassociates.org/wp-content/uploads/2020/11/successful-angel-investors-are-focused-on-the-exit-1.pdf

How to read the article

This article identifies four sets of issues, questions, and analysis angels should consider. This article is not intended to educate angels regarding the techniques and tools to address the issues, questions and analysis,

#1 Alignment of goals.

Do the founders and angels have the same goals?  The angels want to get cash out, which almost always occurs via a sale of the startup.  Do the founders expect to sell the startup? Are the founders focused on the startup being their lifetime calling or reaching the stage where the startup provides a comfortable income for the founders?

Do the founders and angels have the same commitment regarding when to sell the company?  Perhaps on day 1 the founders and investors agree.  Then a buyer comes along which meets the original expectations. What happens if a VC then comes along with a term sheet with a high valuation that the founders want to accept?  Great news with the founders but the investors may end up being stuck in the company for a much longer period time as well as taking the risk that growth never happens or the VC terms preclude a sale.

The founders and angels are aligned on day one for a longer-term sale.  Then VC provide funding with liquidation preferences and accruing dividends.  The eventual sale does occur but the bulk of the cash goes to the VCs with little return for the angels.

What is the financial plan and cap-table leading to exit?  What will the rounds, types of investors, valuation, and key business milestone?

What criteria have the founders and angels agreed upon regarding when to sell. What happens if follow on investors want to change the criteria? What legal protections and agreements are possible to bind the founders and angels?

#2 Will an appropriate exit be possible?

Before an angel writes a cheque, she needs to determine:

  • Who might buy the startup?
  • Why? E.g. a PE firm looking for a 15-year investment or a high-tech company needing specific IP and talent?
  • What would they value it at and why?
  • What must the startup have accomplished?

It is risky to make a cheque and not know if an exit is possible.

The angel’s due diligence process will require validating exit assumptions, through research and even contacting potential future buyers.

The startup financial forecast will include a line for exit planning expenses e.g. going to attending conference and events which attract buyers; building relationships with potential buyers.

#3 What is the potential impact of dilution on founders and angels?

The financial plan and cap table will include all items which may impact capital inflow or capital outflow upon exit including SAFE, convertible debt, preferred shares, debt, government grants, anti-dilution provisions, option pool, etc.

#4 What is the value of pro-rata rights for angels?

  • Pro-rata rights can enable an angel to maintain her percentage equity ownership in follow-on rounds of a successful startup. The angel must determine if they have the financial resources to be able to take advantage of pro-rata rights.
  • The financial plan and cap table can show the financial implications of pro-rata rights.

Your next steps

  • As an angel investor, you require a financial plan and cap-table which leads to an exit. You’ll need the skills and knowledge to create this if the founders lack the skills and knowledge.
  • As a founder, you require a financial plan and cap-table which leads to an exit. You may need an advisor with these skills and knowledge to help you create these.
  • The founders and angels need to discuss the above four sets of issues.
Tom Koor

What can you do to reduce COVID-19 deaths?

As a business leader, you can advise and encourage medical and political leaders to communicate in a way that will result in a massive change in human behavior i.e. the wearing of masks and social distancing.

You know that the way to change the behaviour of employees is to help them understand why each of them must personally change.  Merely telling them to change does not work if they must make a major change in behaviour if results in major personal costs to them

You can help political and medical leaders change their communications in three ways:

#1 Telling people the value to them of making a massive change. E.g. “not wearing a mask may result in your death or your going to hospital.  It may result in the deaths of your family members, friends, neighbours, and colleagues.”

Remember when the anti-smoking ads would show people dying of lung cancer in hospital.

#2 Demonstrate empathy and understanding the pain and cost the leaders are asking the public to undergo e.g. “I understand how difficult this may be for many of you.  You may lose your business or job.  You may have to go to a foodbank.  You may lose your home and have to move in with others”.  It would be very powerful to have someone who has undergone major pain to say a few words about why they thought it was worth it for them.

#3 Use simple words in presentations that everyone can understand.  Often the leaders use words that are hard to understand, especially for those with limited education or new to the country.

I can understand why many people are resisting massive personal change.  I often observe political and medical leaders on TV, all of whom make significant income, dictating to the public, using hard to understand words, while showing no empathy.

I hope that you can help the political and medical leaders change so that there are fewer deaths, hospitalization, and economic devastation.

Stay safe. Stay well.

Tom

You may download a PDF of this article from: https://koorandassociates.org/wp-content/uploads/2020/11/what-can-you-do-to-reduce-covid-19-deaths.pdf

Tom Koor

How do you interview potential customers? V2

The purpose of this article

  • The goal is to help founders as they are launching their startup.
  • The article is structured to help with potential customers interviews starting in the first week of the startup.
  • The information in this article can be modified to help a later stage startup, a scaling company, or an established mature company.

This article is not intended to make you an expert in interviewing potential customers and analyzing interview notes.

You may download a PDF of this article from: How do you interview potential customers V2

What is a startup?

  • A startup is a temporary organization designed to search out a repeatable, scalable and profitable business model with lots of potential customers who are willing and able to pay to solve their problems and needs.
  • A business model describes how a company creates value for itself while delivering products or services to customers. What are you building and for whom.  What customer problems are your solving? What customer needs are you addressing?  What benefits and value are you enabling customers to achieve?

Why interview potential customers immediately?

You don’t want to spend time and money to build a solution for which there are no customers with a problem or needs for which they are willing and able to spend money.  You don’t want to build a cattle ranch for selling meat and then discover that your customers are vegetarians.

The following two articles illustrate the value of talking with customers before you launch a solution.

What must you learn about customers and users?

You need to interview both C&U (Customers and Users). Customers are those who give you money.  Users are those who use your solution but don’t give you money.  You must learn about both of those groups.  Google would not have advertisers if there wasn’t a large number of satisfied people doing searches.

What do you want to learn from your interviews?

There are 5 areas you want to learn about, in a variety of interviews.

  • What are the C&U urgent problems and needs?
  • What do the C&U believe is the value to them if their urgent problems and needs are addressed?  Value can be both financial and non-financial?
  • When during the course of the day do C&U experience urgent problems and needs? How do they feel?
  • How will the C&U daily experience change as a result of your solution?
  • What is the decision-making process? E.g. who are influencers? Who are recommenders and advisors?  Who makes the financial decision?

The analysis of interview may reveal different C&U segments.

How do you analyze interview notes?

 Validating and invalidating assumptions as well as identifying new facts required thematic analysis of the interview transcripts. Two analytical approaches are used:

  • Inductive – the data validates or invalidates assumptions
  • Deductive – the data identities new facts or findings, other than the initial assumptions.

The Further Reading section has links to articles on how to analyze user interviews and how-to use excel in this analysis. As the number of your interviews increases, you’ll be able to analyze them by customer segment, and other characteristics.

The customer journey description in the initial interview is documented in the customer journey map.  The Further reading section has a link to examples of customer journey maps

 The analysis of your interviews, combined with 3rd party market research, will help you determine the market size of each C&U segment.  E.g. Potential revenue = (number of customers with an urgent problem or need that they believe they must spend money on) X (what they are willing and able to spend).

 How do you document your interview learnings?

There are three sets of documents:

  • The business model canvas, updated based on thematic analysis and customer journey mapping.
  • The one-page summary thematic analysis of interview notes. This analysis validates or invalidates assumptions made in the business model canvas.
  • The one-page page summary customer journey mapping, based on what the C&U say during interviews.

When do you interview C&U?

  • You start interviewing as soon as you launch your startup, before you have spent any time or money to start build a solution.
  • You continue to interview throughput the startup journey, as you start to build and validate that your solution addresses C&U problems and needs: Wireframe, proof of concept, functional prototype, pilot solution, initial MVP, enhanced MVPs, and product market fit.
  • You continue to interview as your company grows.
  • You never stop interviewing.

 What is the overall process?

  • Day one of your launch:
    1. Create the business model canvas. It will likely be 100% assumptions.
    2. Create the customer journey map. It will likely be 100% assumptions.
    3. List the assumptions from the business model canvas you want to validate or invalidate, with the open-ended questions you’ll ask.
  • Define the structure you’ll use for your customer journey map.
  • Define the format of the one-page report you’ll create from your thematic analysis of interview notes.
  • Schedule interviews with C&U, selecting C&U represented by your business model canvas. Before you start to build something, you will interview 100 people. Most people will likely decline to be interviewed which means you may be reaching out to 100s of C&U.
  • Develop an interview guide, customized for the initial C&U interviews focused on their problems and needs.
  • Two people must be on the interview, with one person taking detailed notes of what the interviewer said.
  • Document each interview.
  • After each day of interviews,
    1. Update your one-page summary thematic analysis.
    2. Update your one-page customer journey map.
    3. Update your business model canvas, based on your thematic analysis and customer journey map.
  • The interview guides will need to be revised as you learn from interviews and as your startup goes through different stages.

What’s an example interview guide for the first problem validation interview with potential C&U?

  • Start with 1-2 minutes of personal ice-breaking, based on your research of the interviewee.
  • Set the stage for the interview. What are the objectives and how will the interview work.
  • Collect some demographic information about the interviewee, focused on their business or lifestyle in the context of the problems you’re trying to solve.
  • Set the problem context by telling the story of how you identified the problem and why you think the problem is important.
  • Validate the problem by getting the interviewee to rank the urgency and frequency of their problems. Ask the interview if there were other problems which you did not identify.
  • Test the solution. Go through each problem in urgency sequence and ask how the interviewee solves it today, what the value of a solution would be to them, and what this value would be.  This is a very free from discussion with you listening to the interviewee.  The interviewee may be begging for a solution may not care if there is a solution.
  • Conclude by asking:
    1. if OK to come back to discuss your solution.
    2. if interviewee would refer other people for you to interview.

What are the dos and don’ts?

  • Do define your target C&U and select potential C&U who are representative. For example, if you are creating a venture capital fund which will focus on providing investor exits within 3 years, do not interview potential investors who seek a 20+ year exit in-order to facilitate inter-generational wealth transfer.
  • Do face-to-face interviews. Video calls are a distant second best.  Phone calls are a very distant third best.
  • Do document the criteria for assessing the answers. This will avoid confirmation bias, in which you’ll ignore information which invalidates your hypotheses.
  • Do not interview friends, family, or those you have a personal connection with. You need brutal honesty, rather than hearing from people who do not want to hurt your feelings.
  • Do focus on the people who actually have the problem or need for which you are creating the solution.
  • Do create questions which require quantitative answers or specific descriptions. Don’t ask for subjective or hypothetical feedback.
  • Do create questions that help you understand how customers think, and why they take the actions they do.
  • Do not talk about your solution in your initial meeting.
  • Do not ask about price or what customers are willing to pay in the initial meeting. Do ask about the customers costs, budgets, etc.
  • Do finish each interview asking “What should I have asked but did not ask?”
  • Do create a data collection form for each interview. This will contain things such as: the description of the customer profile, your open-ended questions, which hypotheses were confirmed and why, which hypotheses were invalidated and why, which hypotheses you gained no insight into and why, what changes you should make for the next interview (target customer profile, hypotheses, questions to ask).

Other C&U understanding techniques to consider:

  • Watch the C&U (or video record them) as they carry out their work.
  • Actually do the C&Us work yourself.
  • Focus on the C&U who is suffering the greatest pain and determine their work-around solution(s).
  • Understand what the customers’ required outcomes are, as well the problems in achieving that outcome.

What are the challenges in interviewing potential customers

  • The founders, or existing companies, passionately believe that they have created right solution. They believe there is no reason to interview potential customers. They are focused on building the solution and selling it. Their passion results in them being unable to listen to and understand what the customers are saying.
  • The founders, or existing companies, believe any sales and marketing problems can be fixed by changing the sales deck and changing the website.
  • The founders, or existing companies, are passionate that they have the right solution. Hearing brutal feedback from potential customers requires founders who are self-confident, self-aware that they don’t have all the answers, and have the ability to learn and adapt.  I’ve observed many people who are not able to learn and adapt.
  • The founders lack the personality and skills to contact a large number of strangers to setup and conduct interviews.
  • Doing interviews appears to be lack of progress. Building a solution is more fun and appears to be progress.

Your next steps

  • Ensure your team has the skills and experience to interview C&Us and to analyze the results. These may reside either in team members or advisors.
  • Build your interview plan in conjunction with your survey plan. You will be surveying far more people than you interview.

 Footnotes:

1 “What is a business model canvas?”  The following is a link to my article https://koorandassociates.org/tools/what-is-a-business-model/

Further reading:

Creating an interview guide and interview process

The book “Lean Analytics – use data to build a better startup faster” by Alistair Croll & Benjamin Yoskovitz

Chapter 15 “Stage One: Empathy”

How to transcribe an interview

https://www.scribbr.com/methodology/transcribe-interview/

How to analyze user interviews

https://uxplanet.org/how-to-analyze-user-interviews-250fddb1e8d7

An example of using Excel and pivot tables for thematic analysis of user interviews

https://www.youtube.com/watch?v=P0gzlWNodKw

Some example of customer journey maps

https://blog.uxeria.com/en/10-most-interesting-examples-of-customer-journey-maps/

Tom Koor

Venture Capital Investment Decision Making Process

Purpose of this article

Provide startup founders and early stage companies with a broad understanding of the investment decision making process used by VC (Venture Capital) firms.

This article provides a broad generic framework.  The actual process will depend upon the specific VC firm e.g. investing in pre-revenue startups or a $50 million revenue company.  The company  seeking capital needs to learn the decision-making process used by the VC firms they approach. Many VC firms publish on their website information regarding their process.

This article does not address the VC process regarding their existing portfolio companies. i.e. what happens after the deal is closed and the cash is in the startups bank account.

You may download a PDF of this article from: Venture capital decision making process

There 8 steps in a generic VC process

  • VCs are looking to say No as quickly as possible. They may be getting thousand of applications a year, thus the need for careful time management.
  • The VC may say No at any point and may not give the rationale. Recognize that decisions are often a gut-feeling.
  • After saying No, the VC may ask the startup to stay in touch via monthly updates. This often happens. The VC can observe through a number of monthly updates the achievements of the startup, what the startup has learned, and how the startup has dealt with problems and issues.

#1 Sourcing Deals

  • Most of the deals VCs end up investing in come from referrals by people they know and trust.
  • Many VCs also actively look for deals.
  • Some VCs use software to mine the web looking for startups. InReach Ventures in Europe has used custom software to create a database of 95,000 startups.
  • Startups directly apply to VC firms.

 #2 Initial Screening

  • Most VC firms have a set of a few deal-killer criteria to immediately say no to most applications.
  • A VC will spend 3 minutes and 44 seconds reading a pitch deck, on average.1

 #3 Initial partner call or meeting

  • Most VC firms will have a set of criteria to enable a fast No.
  • The key decision at this point is whether or not a VC is interested in learning more.

 #4 Quick Analysis by an associate

  • Follow up with the startup regarding questions from the partner.
  • Assess the pitch deck and answers provided by the startup.
  • Assess the competition.
  • Recommendation on whether or not to proceed.

 #5 Due diligence decision made by a partner

The partner makes the decision to devote a significant amount of associate time to due diligence, which includes:

  • Customer reference calls.
  • Founder reference checking.
  • Deep competitive analysis.
  • Drawing upon technical experts to assess the solution.
  • Drawing upon industry experts to validate analysis of customer problems and needs.
  • Compare the startups to others at a similar stage.
  • Legal due diligence to validate the startups current legal documents.
  • Financial due diligence to validate revenues and costs.
  • An investment memo is prepared with recommendation whether or not to proceed

#6 Partner meeting

  • The partner sponsoring the startup, presents the investment memo to the other partners.
  • The partners make a decision as to whether or not to proceed. The decision-making process is specific to a VC firm.  g. sometimes a unanimous agreement is required.

 #7 Term Sheet

  • How much financing?
  • What type of financing?
  • Terms and conditions regarding the financing?
  • Clarity on how key decision are made and who has what veto powers. g. what decisions require shareholder approval? What decisions require board approval? This is often in a shareholders agreement.

 #8 Closing.

  • A number of documents need to be signed.
  • Cash needs to be transferred into the startups bank account.

One startup told me that the deal fell apart at this point – the cash was not transferred.

 Your next steps

  • Define what value you require from a VC. Is it only money? Their network of potential experts and customers? Etc.
  • Reach out to VCs well before you need the money. The best way is via referral.
  • Research each VC to understand them. When and how do they expect to exit?
  • While the VC is doing their due diligence, you need to do your due diligence regarding the VC. g talk with other portfolio companies, both current and past, to understand what it was like to have the VC as an investor.
  • Start sharing your monthly update with the people who’ve agreed to receive it: your potential investors, your advisors.
  • The potential investor update is different from the update sent to existing investors and the update sent to customers (potential and existing).
  • Remember that potential investors may well read your monthly update on their phone, and only devote a few seconds to it.

Footnotes

1“What we learned from 200 startups who raised $360 million”, Professor Tom Eisenmann, Harvard Business School, and DocSend

https://www.slideshare.net/DocSend/docsend-fundraising-research-49480890

Further reading

How does a startup communicate with potential investors?

https://koorandassociates.org/selling-a-company-or-raising-capital/how-does-a-startup-communicate-with-potential-investors/

Tom Koor

How do you invest in a private company? V2

Purpose of this article

  • Outline questions to ask as you’re considering whether or not to invest in a private company. The questions are focused on a long-term established company.  The company would not be a candidate for early stage or venture capital investing.
  • This article asks questions which may not be part of a standard financial, legal, and human resources due diligence.
  • This article does not cover all of the required due diligence tasks, which include financial analysis, legal reviews, intellectual property reviews, etc.

There are 10 sets of questions to consider:

  • Question #1 focuses on the company’s potential market size and understanding of it’s customers.
  • Question #2 focuses on the potential to grow the value of the company.
  • Questions #3-#10 focus on your relationship with the company and how you’ll get value from your investment.

You may download a PDF of this article from: How do you invest in a private company V2

#1 What is the current and future market place demand for the company’s solution?

Who are the target customers and users? What is their value proposition? Value proposition is the customers and users perception of value.  What are all the financial and non-financial benefits achieved? e.g. time savings, convenience, status, reducing negative emotions or risks, benefits achieved (financial and non-financial) achieved by the customers?  What are all the costs incurred by the customer (purchase costs, costs to switch to your company, other adoption costs, ongoing costs)?

Market Size Metrics

Market size = (The number people (or organizations) with an urgent problem or need that they are willing to spend money) times (the amount they are both willing and able to spend).

What is TAM (Total Addressable Market)?

  • What would be the company’s revenue if 100% of the customers demanding a solution to their problem bought the company’s solution. This assumes all potential geographies, distribution channels and partners.  The number of customers demanding a solution will be fewer than the number of customers that have the problem or need.
  • The best way to calculate TAM is with a bottom up calculation, starting with a clear description of the target customer segments, their problems and needs, and then considering the subset of customers who will actually provide revenue, and the revenue per customer. Recognize not everyone in every country will be able to afford the solution.

What is SAM (Serviceable Addressable Market)?

  • This is the portion of the TAM that is within the reach of the company’s current geographies, distribution channels, and partners, and the company’s ability to deliver and support their solution. This still assumes 100% market share of those customers demanding a solution.

 What is SOM (Serviceable Obtainable Market or Share of Market)?

  • SOM will be lower than SAM for three reasons: there will be competitors, customers who are demanding a solution may not actually buy a solution, and there will be an adoption rate ranging from early innovators to laggards.

Customer Metrics

New customer value achievement leading indicator (e.g. for Slack it was 2,000 team messages sent within 60 days).

New customer success metric (e.g. % of new customers achieving new customer value achievement indicator within 60-90 days).

NPS (Net Promoter Score) The single most important question is asking  “Would you recommend our solution to others?”  (Follow on questions could be “If so, why?  If not, why not?”) This metric is known as NPS.  What is your NPS? Above 0 is good. Above 50 is excellent. Above 70 is world class. How do you compare to your industry and competitors? What has been your NPS trend?

The Net Promoter Score concept was initially developed by Bain.  The following is a link to the Bain website homepage for Net Promoter Score, which contains several short articles:

http://www.netpromotersystem.com/about/why-net-promoter.aspx

The following is a quick overview of using Net Promoter Scores:

https://www.forbes.com/sites/shephyken/2016/12/03/how-effective-is-net-promoter-score-nps/#1b1391b423e4

What have been the findings and trends from ongoing customer interviews and surveys?

What are the scenarios for future market size?

What will be the impact on customer problems and needs due to potential startups, actions of current competitors, and established companies entering the market place either organically or by acquisitions? Remember what happened to Blackberry.  The customers no longer had problems and needs which the keyboard-based Blackberry could solve.

#2 What will drive the value growth of the company?

There are four ways to grow the value of the company:

  • Remain focused on the problems and needs of current customers, but increase the number of customers by expanding geographies, channels, and partners.
  • Target new customers, with different problems and needs which the current capabilities of the company can solve by creating new solutions.
  • Eliminate unprofitable customers, customer segments, geographies, channels, and partners.
  • Improve the internal operations of the company: develop current talent, acquire new talent, eliminate inappropriate talent, improve or change the processes, improve or change the technology. Talent includes: the board of directors, CEO, C-Suite, employees, advisors, consultants, contractors, and outsourcers.

The above four value growth opportunities could be addressed organically, by acquisitions or divestitures.

How are you going to help drive the value growth of the company, in addition in addition to your capital?

  • Using your network to help obtain customers, employees, and other investors?
  • Using your knowledge, skills, and experience to serve on the board of directors or advisory board?
  • Coaching and mentoring the CEO or C-Suite?

#3 Who will buy the company or your shares in the future?

  • A strategic buyer?
  • A financial buyer?
  • An owner/operator?
  • Employees?
  • IPO?

#4 Why will they buy it?

  • Growth potential?
  • Operational improvement potential?
  • Access to company’s customers, distribution channels, and partner?
  • Access to company’s talent and intellectual property?
  • Leading and defensible market position?
  • Non-concentrated channels and partners?
  • Sustainable margins?
  • Proven management team with successors?

#5 What will they pay for it?

  • Multiple of EBITDA or free cash flow?
  • Terms and conditions?

#6 What is the exit plan?

  • You or major shareholder(s) die?
  • One shareholder wants to exit?
  • Your plan to exit in Y years? If so, how?

#7 How will you and other shareholders take value out of the company?

  • Final sale of the company?
  • Interim financing enabling your partial or total exit?
  • Dividends?
  • Products or services?

#8 How will decisions be made?

  • What decision will be reserved for shareholders and what is the decision process?
  • What % of equity and what % of shareholders will be required for decisions?
  • What veto power will individual shareholders have?
  • Does the CEO have any veto power?
  • What decisions, if any, will be made by the board of directors?
  • What is the delegation of authority to the CEO?

#9 What is your fit with the other shareholders and management team?

  • Do you have a common set of values, morals, and ethics?
  • Can you work together?

#10 What will be in the shareholder’s agreement?

  • What the shareholder objectives are?
  • The answers to questions #6, #7, and #8.

Your next steps

  • Define your investment decision-making criteria and process. This includes: the financial aspects of your overall long-term financial plan, and your long-term life plan.
  • Which criteria are deal-killers?
  • Define the overall due diligence process – structured data collection and data analysis.
  • Execute your structured data collection, data analysis, and decision-making process.

Recognize that emotions and gut-feelings will still play a key part in your final decision.

Further reading

  • How can a private company sell securities in Ontario?

https://koorandassociates.org/selling-a-company-or-raising-capital/how-can-a-private-company-sell-securities-in-ontario/

 

Tom Koor

Who launches a successful startup?

Purpose of this article

  • To help you decide if you’re the type of person who should launch a startup.
  • Outline what you should do in the first two weeks if you are thinking of launching a startup.
  • Recommend some learning you should undertake, to help you make your decision.

You may download a PDF of this article from:  Who launches a successful startup

What is a startup?

  • A startup is a temporary organization designed to search out a repeatable and scalable business model. Lots of learning experiments are carried out. The focus is on getting some delighted cash paying customers.
  • A business model describes how a company creates value for itself while delivering products or services to customers. What are you building and for whom? What urgent problems and needs are you solving?

Week one

I recommend that you read the following two books.  They are a fact-based portrayal of the challenges founders face, and what the characteristics are of successful founders. Movies, TV, books, and founders often paint a picture of how easy startup success is.

“The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers” by Ben Horowitz.

  • Ben describes the incredibly tough challenges and experiences he went through in the process of his ultimately successful startup. He then became a successful venture capitalist. Most startups fail.
  • As you read the book, think about your own ability to deal with the challenges than Ben went through and that you would be going through. Not only do you need perseverance and ingenuity,  you also need an emotional and mental support network.

“The founder’s dilemmas – anticipating and avoiding the pitfalls that can sink a startup” by Noam Wasserman.

  • He was the Professor of Clinical Entrepreneurship at the University of Southern California and the director of USC’s Founders Central Initiative. The book is based on his study of 10,000 founders from 3,500 startups.
  • As you are reading the book, think about whether you are the type of person who would succeed as a founder. You are more likely to make more money as an employee rather than launching your own company.

Week two

  • Are you driven by having a great idea OR are you driven by wanting to solve an urgent problem or need for a large number of people?
  • What’s your ability to quickly learn new things and transform yourself?
  • Take the free video course “How to build a startup”

https://www.udacity.com/course/how-to-build-a-startup–ep245

Take detailed notes. There is little value in passively watching without taking notes.

Your next steps

You need to make a decision on whether or not to continue.  This could take days or weeks, especially as you involve your life partner and support network. Some of the factors to consider include:

  • Do you recognize that you are launching a search for a business, which is much different from launching a business?
  • How will you, your life partner, family, and friends feel at the end of several years when your startup fails? Few startups succeed.
  • Are you passionate and driven to succeed?
  • Launching a startup to make a lot of money is the wrong reason.
  • Are you focused on solving a problem, meeting the need of a large number of people OR do you just want to build something?
  • Are you able to learn the problems and needs of a large number of people and then change your startups focus to meet those needs?
  • Do you have the cash (personally, from family and friends) to grow the startup until there is revenue. Few startups are able to raise cash without revenue.  What would be the impact on you, your life partner, family, friends when your startup loses all the investment – which is the most likely outcome?
  • Do you have a co-founder with a different set of skills? Most startups have 2-4 co-founders to provide a range of skills and provide backup if a founder suddenly exits due to health or personal reasons.

Footnootes

1 https://s3-us-west-2.amazonaws.com/cbi-content/research-reports/The-20-Reasons-Startups-Fail.pdf

 

 

Tom Koor

Pitch evaluation – what are deal killers?

Purpose:

This article has a two-fold purpose

  • Encourage startup founders to research the deal-killer evaluation criteria used by investors to quickly determine whether to devote further time to learn about a startup. Given the massive number of startups looking for funding, time constraints force investors to be able to say “no” as quickly as possible.
  • Encourage board of directors and CEOs of established companies to also develop their own deal-killer criteria as a filter for the many proposals and recommendations made to them.

This article:

  • Reflects my personal point of view. Investors, board of directors, and CEOs will have their own deal-killer criteria.
  • Is not intended to score a pitch or enable a relative ranking of pitches.

You may download a PDF of this article from: Pitch evaluation – what are deal killers

My deal-killer criteria are based on 3rd party research regarding the 3 greatest contributors to startup failure?1

This research study analyzed 101 startup failures and identified the most frequently cited reasons for failure.  Usually there were several reasons for failure.

  • 42% of the time built a solution looking for a problem i.e. no market need.
  • 29% of the time running out of cash.
  • 23% of the time, not the right team.

Deal-killer criterion #1 What is the size of the market need?

How many customers believe they have an urgent enough problem or need that they

  • Are willing to spend money to address;
  • Have the money to address;
  • Have put a value, including what would pay, on addressing the problem or need.

Has the pitch described the customers’ value-proposition?

This is the customers perception of value.  What are all the financial and non-financial benefits achieved? e.g. time savings, convenience, status, reducing negative emotions or risks, benefits achieved (financial and non-financial) achieved by the customers?  What are all the financial costs incurred by the customer (purchase costs, costs to switch to your company, other adoption costs, ongoing costs and non-financial costs (e.g. time, social status, existing relationships, etc.)

To understand the customers perception of value requires direct input from potential customers, by a combination of interviews and surveys.  Most of the pitch I hear reflect the either the founders opinions/hopes of the startup or a one-page slide showing market size in the $10s of billions, based on a consulting/research study.  These startups are taking the ”build it and they will come approach” of first creating the solution and then hoping that there are customers.

What is TAM (Total Addressable Market)?

  • What would be the startup’s revenues with their future solution if 100% of the global customers demanding a solution to their problem bought the startup’s solution? TAM is the case with no competitors.
  • The solution built in the first 12 months is only a subset of the solution which in 5 years time will address TAM i.e. TAM depends upon the specific nature of the solution at a point in time. Note the phrase “demanding a solution”. You must not include in TAM ghost customers who are not demanding a solution.  If customers don’t know they have a problem and are not demanding a solution, the startup is planning to fail.
  • There is a critical difference between customer needs and customer demands. Customers have a large number of needs.  Demand is customers deciding that they will spend time, effort, and money to get a solution for what they believe is an urgent need.  Often this means that customers will spend less money to meet other needs.
  • Is the startup’s TAM large enough to launch and grow the company? For example, the global smart phone TAM is huge, but the global TAM for smart phones that have a keyboard is tiny.
  • The best way to calculate TAM is with a bottom up calculation, starting with a clear description of the target customer segment, its needs, and then considering the subset of customers who will actually provide revenue, and the revenue per customer. Recognize not everyone in every country will be able to afford the solution.

What is SAM (Serviceable Addressable Market)?

  • This is the portion of the TAM that is within the reach the startup’s distribution channels and partners, and your ability to deliver and support your solution. Geography may be a constraint. This still assumes 100% market share of those customers demanding a solution. SAM will change over time, as growth occurs in geography, the number of distribution channels and partners, and the volumes from each distribution channel and partner.
  • How will customers connect with the startup?  If they are seeking a solution, how will they find the startup?  How will the startup make customers aware of the solution?

What is SOM (Serviceable Attainable Market or Share of Market)?

SOM will be lower than SAM for two reasons: the startup may have competitors, and every customer who is demanding a solution may not actually buy a solution.

Deal-killer criterion #2 When will the startup run out of cash?

This is rarely presented in the pitch. If there is time, follow-on questions can provide insight:

  • How many months out does the monthly cash flow forecast go (many startups lack this)?
  • Given current customer income and costs plus existing cash in the bank, how many months until cash is gone?
  • Assuming that there are three future forecasts, how many months until the cash is gone in the most conservative forecast?
  • How many weeks have they assumed that it will take to close the current financing round?
  • How many weeks have they assumed from the end of the current financing round until the next financing round?
  • The average seed stage round takes 12 ½ weeks. 20% of the startup require 20 weeks or longer. 20% of the startups require 6 weeks or less.2
  • A fund-raising round can take a long time. This research study examined 13,916 financing events.3 The average time between fundraising rounds was 20.6 months. The time between rounds ranged from 6 months, to 35 months, 68% of the time.  e. 16% of the time less than 6 months and 16% of the time longer than 35 months
  • The above fact-based research was done prior to COVID-19.

Deal-killer criterion #3 Does the team have relevant experience?

  • Assess the skills and experience requirements implied by: the target customers, the value proposition, the nature of the solution to be built, the needed partners and suppliers, etc. Have the founders demonstrated that the team (which includes investors and advisors) has the relevant experience, skills, and network.
  • Most founding teams have gaps. Have the founders identified the gaps and milestones to close the gaps.

How do I use the deal-killer criteria?

I focus on whether the founders are doing the right thing, that they have the right approach and mindset.  I don’t expect the perfect research and perfect analysis.

Deal-killer criterion #1 What is the size of the market need?

  • If the founders do not believe they need direct input from customers, the deal is dead. Most of the startups I meet fall into this category.
  • If the founders market size slide shows a massive number and at the same time does not reflect understanding of TAM, SAM, and SOM the deal is dead.  I cannot tell from a pitch if the founders don’t understand the concept or are being deliberately deceitful. Unfortunately, many founders are not coachable on these concepts.  I’ve also met deceitful founders.

Deal-killer criterion #2 When will the startup run out of cash?

Founders rarely give enough information in a pitch to assess this. There’s rarely enough time in a pitch Q&A session to ask the detailed questions regarding cash flow. The questions can be a follow-up action for the founders after the presentation. This is a deal-deal killer if:

  • The monthly cash flow forecast does not exist.
  • The founders have an extremely optimistic view of how quickly funds can be raised.
  • The founders are already almost out of cash.

Deal-killer criterion #3 Does the team have relevant talent and experience?

  • I don’t expect the team have had a long history of experience in the target marketplace, target technology, etc. Historical knowledge often becomes obsolete.  What’s key is current knowledge and the mindset to keep that knowledge up-to-date.
  • I expect that the team has learned about the customers, the customer perception of value, competitors, partners, technology etc.
  • The team includes: founders and key leaders, advisors, board directors, and major investors.

Your next steps

  • Define you own deal-killer criteria.
  • Define in detail the criteria and process for evaluating the team’s relevant talent and experience.
  • Pitches for major change to an established company (e.g. transformation) will require a third party to assess the board of directors and key advisors and consultants for their relevant talent, skills, experience, and personal networks.

Footnotes

1 https://s3-us-west-2.amazonaws.com/cbi-content/research-reports/The-20-Reasons-Startups-Fail.pdf

2“What we learned from 200 startups who raised $360 million”, Professor Tom Eisenmann, Harvard Business School, and DocSend

https://www.slideshare.net/DocSend/docsend-fundraising-research-49480890

3 https://medium.com/journal-of-empirical-entrepreneurship/how-much-runway-should-you-target-between-financing-rounds-478b1616cfb5

Tom Koor

What are the different kinds of startup pitches? V2

This article has a two-fold purpose:

  • For startups at the pre-Series A stage, outline the different kinds of startup pitches.
  • For established companies, outline different ways to describe their companies, business units, and major projects.

You may download a PDF of this article from: What are the different kinds of startup pitches V2

The purpose of the pitch is to convince investors when you first meet them that they must learn more about you, and your company.  Investors are swamped with pitches every day; therefore, most investors seek to be able to say “No” as quickly as possible to minimize their time.

Many investors and funds have deal killer criteria.  These are the few criteria, which if you don’t address in your pitch, result in the investor immediately saying “”No”.

Investors will not write a cheque based just on the pitch.  Investors wanting to learn more about you results in further presentations, meetings, and due diligence.

There are two types of pitch decks:

  • The in-person deck. This deck supports the someone doing a presentation.  The bulk of the information is communicated orally. The deck is very visual with a limited number of words and numbers.
  • The standalone pitch deck. This is designed to be read without someone speaking. This deck contains the all the key talking points, words, and numbers.  This deck is often left behind after a presentation and often emailed to potential investors.

There is a difference between a pitch (which is what the founder says) and the pitch deck (which are the slides).

The objectives of the pitch are:

  • Convince investors why the company must exist.
  • Be memorable – the investor must remember you the next day. Otherwise you won’t be called back.
  • Be professional – look and speak as if you already are the CEO of a successful company. This includes your body language, how you stand, and how you speak.
  • Create a trust, confidence, and emotional connection between the investor(s) and presenters.
  • Create the excitement and interest in the investors to learn more, while demonstrating your oral presentation skills and ability to have a Q&A dialogue.
  • Be able to communicate with an audience that has no previous information about you. Assume that the investors are not experts regarding your customers, your industry, or your technology.

You need to answer seven common key investor questions:

  • What do you do?
  • How big is the market?
  • What is your progress?
  • What is your unique insight?
  • What’s your business model?
  • Who is on your team?
  • What do you want?

More detailed information regarding these 7 questions is available at;

https://blog.ycombinator.com/how-to-pitch-your-company/

Your approach during your presentation should be:

  • Engage the investors emotionally with the story about the startup.
  • Make a great first impression. The first few seconds can make or break you.

The one sentence pitch

“My company (company name) Is developing (a defined offering) to help (a target audience) (solve a problem) (with secret sauce).”

The one sentence pitch is further described in this link to the Founder Institute:

https://fi.co/madlibs

The 2 sentence Email Test

The Email Test. Write up a two-sentence explanation of what your startup does then email it to a smart friend. Ask them to explain it back to you in different words. If they ask any clarifying questions, you need to revise your pitch. It’s important to revise your two-sentence pitch because you can’t add explanations as you would in conversation.

Further information is available at:

 Your one-minute pitch

When you have only 60 seconds to make your pitch, the critical elements are:

  • Who are you? < 5 seconds. One sentence.
  • What’s the customer problem? < 20 seconds. 3-5 sentences.
  • What’s your solution? < 25 seconds. 2-3 sentences
  • What’s your ask? < 5 seconds. One sentence.
  • What’s the one sentence everyone in the audience needs to remember? < 5 seconds/

What can we learn from a study of 200 pitch decks that were successful in fundraising?1

How long does an investor spend to look at a pitch deck emailed to them? 3 minutes 44 seconds

How many seconds does an investor spend on each part of the pitch deck emailed to them?

  • Financials……..……23.2
  • Team……….……….22.8
  • Competition………..16.6
  • Why now?…………….16.3
  • Company purpose…15.3
  • Business model…….14.9
  • Product…………..….13.9
  • Market size………….13.3
  • Problem………….….11.3
  • Solution………………10.6

 What was the average structure of the pitch deck, what % of startups had the section, and what was the average number of slides in each section?

  • Company purpose…73% 1.8 slides
  • Problem…………….88% 2.0 slides
  • Solution…………….69% 1.2 slides
  • Why now……………46% 1.7 slides
  • Market size…………73% 1.4 slides
  • Product………….….96% 5.0 slides
  • Team …………..…100% 1.2 slides
  • Business model……81% 3.4 slides
  • Competition………..65% 1.4 slides
  • Financials…………..58% 2.3 slides

 What are investor expectations for your pitch?

  • Do your research to find out what investor expectations are for your pitch.
  • Many investment funds and angel groups publish their expectations on their website. Ask other startups who have presented to the investors.
  • Prior to your pitch to investors, ask them what are critical items they want to understand and hear. Validate these by repeating them at the beginning of yoru presentation.  Success is harder if all you do is give the identical pitch to every single investor and haven’t spent time to learn about them.

The following are some examples of investor expectations:

Maple Leaf Angels (Toronto)

The following is a link to their pitch deck template on their website.  They also publish their criteria for evaluating pitches and their data room expectations.

https://mapleleafangels.com/wp-content/uploads/2020/07/Elevate-Your-Pitch-Template-Deck.pdf

The following are links to what three organizations have defined as their pitch deck expectations

  • MaRS Discovery District in Toronto

https://www.marsdd.com/mars-library/how-to-create-a-pitch-deck-for-investors/

  • Sequoia

https://www.sequoiacap.com/article/writing-a-business-plan/

  • Y Combinator

https://www.ycombinator.com/library/2u-how-to-build-your-seed-round-pitch-deck

 Your next steps

  • Create the different kindsof startup pitches.
  • Before you present, research you target audience to understand their expectations.
  • Change your oral and written presentation to meet the critical requirements of your target audience.

 Footnotes:

1 “What we learned from 200 startups who raised $360 million”, Professor Tom Eisenmann, Harvard Business School, and DocSend

https://www.slideshare.net/DocSend/docsend-fundraising-research-49480890

Further reading

  • Excellent insights into creating and giving your pitch

https://medium.com/crane-taking-flight/fundraising-why-you-shouldnt-just-copy-sequoia-s-pitch-deck-template-4b32ac60d93a?

  • What is “Company purpose”

https://medium.com/@iskender/the-perfect-pitch-deck-designed-by-a-vc-902842ce7f38

 

Tom Koor

Education, skills, and tools for an early stage startup. V1

The purpose of this article.

Outline what an early stage startup requires to understand the potential customers, users and the competition. Too many startups fail because:

  • They start to build something (e.g. “a cattle ranch”) and then discover there is no significant market demand (e.g. discover that the potential customers are “vegetarians” and will not every buy, regardless of the changes they make to the sales pitch.)
  • They don’t realize the breadth of skills, experience, networks, and tools required to understand customers and users.

You may download a PDF of this article from: Education skills and tools for an early stage startup V1

What is a startup?

A startup is a temporary organization designed to search out a repeatable, scalable, and profitable business model.

A startup needs to organize its knowledge and resources. The founders need to have, learn, or get access to skills, experience, tools, and networks.

There are 12 sets of education, skills, and tool to enable understanding of customers.

#1 Find people to guide and advise you in your journey

The critical action is for the founders to create relationships with people they can learn from.  These may include: coaches, mentors, advisors, incubators, accelerators, etc.  The challenge for the founders is to find those people who can truly enable success.  There is a shortage of talent that can help founders learn how to succeed.

#2 Education and Learning – courses and books

I recommend the Udacity free course “How to build a startup”. This will provide founders with an overall framework on how to organize their knowledge and actions for launching a startup. Take notes.  If you don’t take notes, there is limited value in taking the course.  https://www.udacity.com/course/how-to-build-a-startup–ep245

#3 Business Model Canvas

The BMC (Business Model Canvas) is the foundation of your startup.  The BMC describes the value a startup can offers its customers, why they buy from you and illustrates the capabilities and resources required to create, market, and deliver this value and to generate profitable, sustainable revenue streams. What customer problems are your solving? What customer needs are you addressing?  What benefits and value are you enabling customers to achieve?

The BMC is a one-page document. The Udacity course will guide you with creating the BMC and has many examples of the one-page document. The following is a template you may use.

https://neoschronos.com/download/business-model-canvas/docx/

The BMC is the central hub for everything the startups is learning.  All the facts, analysis, and assumptions in the pitch decks are from the BMC.  All the supporting information is linked to the BMC.

You manage the point-form information in the BMC:

  • All assumptions in italics. On day one of launching the startup, it’s likely that all of the entries will be assumptions.
  • When assumptions are invalidated, due to input from customers, users, and other fact-based analysis, the assumption is crossed out, with a footnote referencing the document which contains the rationale for invalidation.
  • When an assumption is validated, there is a footnote referencing the document which contains the rationale for validation.

There will be multiple versions of the BMC over time.  You won’t be able to show all of the invalidated assumptions.  New assumptions will be made.  Only the most important validations will remain on the BMC. Less important validations will be dropped from the one-page BMC.  You may decide to keep an appendix which contains all the of the invalidations and validations.

#4 Interviewing customers and users.

  • The Udacity course makes clear the need to interview customers and users right from the start up the launch. The need to interview customers is also outlined in this article:
    1. Talk to 100 customers before you launch https://medium.com/build-something-cool/yes-you-should-talk-to-100-customers-before-launch-afa1962f5c7
  • Some ideas on how to structure interviews and an interview guide are in the following book:
    1. Chapter 15 “Stage One: Empathy” from “Lean Analytics – Use data to build better startups faster” by Eric Ries. Available on Amazon
  • Some thoughts on how to analyze interviews:
    1. You must do a thematic analysis and code the interview response.
    2. https://uxplanet.org/how-to-analyze-user-interviews-250fddb1e8d7
  • Possible software to help with interview analysis
    1. Excel pivot table can analyze the coded interview responses. This should be sufficient in the early days of the startup.
    2. There are also software packages.
    3. https://blog.hubspot.com/service/qualitative-data-analysis-software
  • The team needs to have or learn the skills needed to:
    1. Plan for an interview. The objective is to validate or invalidate assumptions.
    2. Conduct an interview. Not everyone has the skills and personality to conduct interviews. Two people should be in an interview.  One person is taking detailed notes.
    3. Produce a one-page summary analysis

#5 Surveying customers and users

  • The team needs to have or learn the skills needed to survey large number of potential customers and users.
    1. Planning for the survey.
    2. Conducting the survey
    3. Analysing the survey
  • Survey software is helpful to reach out to and analyze responses from a large number of potential customers and users.
  • The final outcome will be a one-page summary analysis

#6 Managing the large number of relationships

You will be interviewing, surveying and meeting hundreds of potential customers, users, and others.

You need a process and tool to keep track of these relationships and help you manage them.

  • A CRM (Customer Relationship Management) software tool is very helpful.

#7 One-page Gannt chart, showing critical milestones

#8 Your startup is a project.

Project management processes and software may be helpful. When there are just a few founders, the very early project management may consist of:

  • The one-page Gantt chart with milestones, likely done in a tool like PowerPoint.
  • One page showing key tasks for the next 7 days.
  • A meeting at the beginning of each day to outline what will be done that day.
  • A meeting at the end of the day to discuss learning and issues.

#9 Collaboration is needed, especially with teams not in one physical location.

  • Collaboration may include: working together on documents and sharing them, messaging, team meetings (phone and video), virtual whiteboards, etc.
  • Collaboration may occur among the startup team, advisors, and others.

#10 Monthly cash flow forecast

  • The cash flow forecast helps the startup identify what is being done with cash, where revenue will come from and when additional cash is required from the founders, friends and family, governments, or 3rd party investors. The founders need to ensure the startup manages its cash to survive.
  • The monthly cash flow forecast will be detailed. It will be summarized in one page.

#11 Virtual data room

  • The startup will be generating a variety of documents with many versions.
  • These need to be organized into a single data room, shared among the startup and 3rd
  • It’s crucial that each document’s file name contain the date the document was created or last modified. The content of each document must also contain the date and page number, to enable discussion among the startup team and 3rd
  • The data room must also be backed up.

#12 Creating presentations, documents and videos

The startup will be creating presentations, and videos.  A single set of integrated tools is helpful.

Your next steps

  • Find people to and advise you in your journey. They could be mentors, incubators, accelerators, etc.
  • Create your plan to understand your potential customers.
  • Determine and acquire the necessary education, skills, and tools.
  • You are focused on creating five one-page documents:
    1. The business model canvas, which describes what you will build to solve customer and user problems.
    2. One-page summary of customer and user interviews – identifying and validating customer and user problems.
    3. One-page summary of customer and user surveys – validate or invalidate of the assumptions regarding customer and user problems.
    4. One-page Gannt chart illustrating what you will accomplish and by when.
    5. One-page cash flow summary illustrating the cash needed to accomplish the milestones in the one-page Gantt chart.
  • It’s likely that you may replace many of the tools as your startup grows and transitions to a business. It is not appropriate to have the tools needed to run a billion-dollar global company on the first day that you launch your startup.
Tom Koor

Why do startup CEOs fail? V4

The three-fold purpose of this article:

  • Help startup CEOs and founders understand themselves and identify potential fatal flaws.
  • Help investors, and others, assess startup CEOs and founders.
  • Help assess the CEO’s of traditional established companies.

The following is focused on software and high-tech startups.  Many of the concepts apply to other situations.  CEO failure results from an inter-related set of experience, skills, character, personality, values, morals, ethics, and luck.

You may download a PDF of this article from: Why do startup CEOs fail V4

Research regarding the most critical traits of successful founders.1

Founders with complementary skills sets tend to be successful. “The best founders know their strengths and weaknesses and recruit a complementary team.” Founders of all ages can be successful.  Age is not a predictor of success.”

There are three archetypes of successful founders:

  • Humble Operator: Exceptional at execution, extremely humble while confident in themselves. They are resourceful and gritty. People who worked with them before tend to follow them.
  • Agile Visionary: Usually first-time founders, they are young, visionary, and driven by a desire for greatness. They have a unique perspective on the market they’re going after and an intuitive sense of what their customers want. They test and iterate quickly to incorporate market signals.
  • Seasoned Executive: Experienced older founders, they often have 5+ years of management experience and deep industry expertise. They are intrinsically motivated to build a company. They may have started a company before.

There are three archetypes of unsuccessful founders:

  • Passionate Outsider: Usually first-time founders, they are humble and hard-working. However, they don’t have good founder-market fit and don’t have a complementary cofounder to rectify this gap.
  • Overconfident Storyteller: Charismatic, compelling, and have high confidence. They are likely to be solo founders and they are often not humble.
  • Stubborn Individualist: Slow to adapt to learnings from the market and not empathetic to what the customers want. They are not good at articulating a convincing narrative.

Successful founders have four superpowers:

  • Running her company effectively day-to-day, learning and adapting quickly
  • Results driven i.e. exploring many solutions to quickly finding the best one.
  • Customer empathy, which enables finding product-market fit.
  • Agile thinking i.e. able to iterate quickly based on market feedback, but at the same time persistently focused on the vision.

Successful CEOs have founder-market fit.

Founders with a deep understanding of the market have founder-market fit.  There are 4 signs of founder-market fit:

  • The founders are obsessed with the market. They are obsessed with market knowledge.  This results in them knowing everything about the market, what a day-in-the life of a customer looks like, the customer’s urgent problems, the competitors, et.
  • The founders’ personal stories. Customers are excited by personal stories which explain why the founders are obsessed.
  • Personality is the ability to build a network in the market and the market’s ecosystem.
  • Experience but not so much experience that the founders are constrained in their ability to disrupt, and to be able to see new and innovative ways of doing things. The degree of appropriate historical market/industry experience varies by market. e.g. Developing a new drug requires a degree of past experience.

The first point-of-failure is when the CEO is thinking of founding a company and becoming CEO.  Examine yourself.  Do you already have the characteristics of someone who is likely to fail?

  • Not able to clearly communicate on why starting the company and what the idea is.
  • Not having a very broad set of knowledge or being able to quickly learn a broad set. A startup CEO does it all without the infrastructure of a large company to support her.
  • Not relentless and able to overcome all obstacles.
  • Not able to do things quickly.
  • Not able to quickly learn from mistakes.
  • Not able to work long hours for many years. The average time for a SaaS startup to exit or IPO is 9 years.  But the vast majority fail.
  • Not willing to take risks. The majority of startup CEOs are forced to leave the company at some stage of funding.
  • Not able to minimize cash spending.
  • Not having the funds (personal savings, family, and friends) to live for a significant period of time without income from your company.
  • Not able to ruthlessly prioritize time e.g. who to meet vs who not to meet; problems which must be solved vs can be ignored.
  • Not having the personality and skills to build a broad set of trusted relationships with potential customers, suppliers, employees, advisors, investors, etc.
  • Not able to attract appropriate coaches, mentors and advisors. There are major differences between star athletes and star coaches.  The same person is rarely a star in both fields.
  • Not able to listen, and clearly understand what the other person intends to communicate.
  • Not willing to go all-in
  • Not extremely intelligent.

The second-point-of failure is when the CEO makes a poor selection of co-founder(s) and is not able to manage co-founder(s).

  • Not able to select co-founders with the range of experience and skills necessary for short-term team success. Co-founders should bring diverse experience and skills, resulting in the pool of capabilities necessary to create and launch the company.
  • Not selecting co-founders with similar objectives, character, values, morals, ethics, and time lines.
  • Not picking founders who have the personal financial resources to live until the company can afford to pay them or third-party investors can provide financial support.
  • Not having a common understanding of what each co-founder will contribute e.g. # of hours, capital, finding capital, creating the product or service.
  • Doesn’t have the skills to make the founders work well together.
  • Not being clear on how decisions are made, and who makes them.
  • Doesn’t ensure that the founders are physically located together and working together.
  • Unable to articulate and help the all the co-founders understand and support the higher purpose of the company. If the only purpose is to make money, the chances of long-term success are low.
  • Not having a common understanding of how much of the company the founders are willing to give up in return for capital.
  • Not documenting expectations and assumptions. This leads to future confusion and disagreements. “People forget 40%-80% of what they hear immediately.   Half the information people do recall, is recalled incorrectly”2

 Your next steps

Regardless of the situation, the CEO or founders need the capabilities to be successful in the next 24 months and to be competitively differentiated from the CEOs/founders of competitors.

  • If you are a startup CEO or founder: Assess your self and compare that to how others view you.
  • If you are an investor, advisor, someone planning to join the startup CEO: Review the above criteria and prepare your own list of criteria. Identify the deal-killers or fatal flaws and the criteria that are important. Assess the CEO or founders. You don’t want to be associated with a CEO or founders who will likely fail.
  • If you are the board of directors or major investor in a traditional established company: Prepare you own list of criteria. Identity the deal-killer criteria i.e. whether to terminate existing CEO, not to appoint a candidate as CEO or not to invest in the company.  Identify the criteria that are important. Assess the CEO. Boards should not a have a CEO who is likely to fail.  Investors should not deploy capital to CEOs who are likely to fail.

 Footnote

1 Basis Set Ventures, a San Francisco early stage fund, surveyed other funds to understand their opinion of the traits of successful vs unsuccessful founders.  https://www.basisset.ventures/founder-superpowers

2 Lindsay Wizowski, Theresa Harper, and Tracy Hutchings, Writing Health Information for Patients and Families 4th Edition (Hamilton Health Sciences, 2014), Page 5

Further Reading

How do  venture capitalists assess teams https://koorandassociates.org/selling-a-company-or-raising-capital/how-do-venture-capitalists-assess-teams/