It’s probably best that I quickly summarize and give those who aren’t familiar with startups and fundraising a quick 101 lesson of the ecosystem and how it functions.
I’m sure it’s safe to assume that every single person reading this regularly uses some sort of technology on a daily basis. These products didn’t just appear out of thin air. People — humans, like you and I made them. There is a team of individuals behind everything you see — the founder, engineers and designers are typically the core team, but of course as the product gains traction and begins to scale, so does the size of the team and a more diverse group of individuals are needed.
Yes, it is possible if within your tight network and core team of founders to execute how you envision without the need for outside capital, and organically bootstrap growth — but typically the vast majority of startups require an investment to better execute and scale at a quicker rate. So, therefore we need investors!
Investors are of course a very critical part of the ecosystem. Most of the individuals within the ecosystem that are legitimate and building investable companies are all heavily involved. We are connected at all times. We all learn from each other and read each others blog’s. We stay up to date on what’s working and isn’t, who’s raising cash from who, what products are gaining traction and so on. We’re all constantly plugged in and over time you come to realize that even though the industry is so large, it begins to seem smaller and smaller as you see everyone is connected somehow, some way.
The more competitive an ecosystem becomes, the more you need to raise your level of play as more value from every angle needs to be provided, and yes you’re damn right — that includes investors.
I meet with an investor the other day and he decided that we were too early and he wanted to see a bit more growth in the company before he invested.
But here’s the thing.
He will get absolutely zero deal flow at the stage that he prefers and I can almost guarantee that the deals that he does see at that stage and any company that he invests in will fail. Of course when one typically generalizes, they’re probably wrong — so let’s just say his chances aren’t looking good. It’s the brutally honest truth.
Because at the stage of a company that he suggested is comfortable for him to invest in — any legitimate founder who would very likely provide a return on such investment should be able to be in a position where they can choose who they want to take money from.
At that stage their product would already have traction and the founders would be able to demonstrate desirable growth therefore will very likely be in a position where they can be selective as far as their investors are concerned.
Some of the largest, most known investors have trouble closing these deals because at this point the money pretty much crosses itself out and the entrepreneur needs to take into consideration what other value an investor can offer. So investors are becoming more and more creative so that they can provide more value and attract a higher quality deal flow.
Typically the best value investors provide beyond cash is industry insight, connections to assist in closing critical partnerships, recruiting necessary talent to strengthen the team and considering that well known investors have become a brand themselves — attaching their name to something provides much exposure, which comes in handy especially if your startup is in the consumer internet space.
Many of the investors that I am reaching out to want to see some more growth before committing. However, the stage at which they want us to be at — I know for sure I’d be able to raise from more established investors that would be able to provide more value in return, therefore the less prolific investor will likely be left out of the deal.
Early stage investors need to be entirely aware of who they are competing with at the stage they wish to enter a deal. If you can’t provide as much value as other more established investors currently can that you are competing with and entering these deals at the same stage — then you need to assume greater risk by entering into these deals earlier than you normally would like to in order to be part of the best deals that will prove to be world class teams, solving real problems. Otherwise, you will unfortunately get left out of these deals. It’s just the nature of the game.
I believe that their lack of willingness to take greater risk is why their portfolio’s are subpar and unfortunately, is very likely the reason why they will never have a major breakthrough and take their portfolio to a world class level.
The beauty of a competitive ecosystem is that power tends to ultimately be somewhat distributed. The option to be selective is a privilege that is earned — and whether you are the entrepreneur or the investor, your ignorance to the fact that you are not yet in a position to be too selective will likely prevent you from ever being in a position to legitimately do so.