I want to invest in a startup. To whom I will definitely not give money - No fears

Vector, together with Sigma Software Labs, continues the educational project about startups - No Fears.

Within two weeks, we release 10 materials. Editors and experts will dispel fears, inspire stories and give advice to those who want to launch a startup, but are afraid.

In the sixth article, we asked venture capital and angel investors what they pay attention to when meeting with startups, and who they definitely won't give money to. And also created a portrait of an ideal pitch.

The investor pays attention to...

Current and potential market size

This is the most popular answer among investors.

"Venture funds are looking at markets with a volume of more than $1 billion. If the team manages to convince that the startup has a good chance of reaching a monopoly or oligopoly position in the market, then its size may be smaller," said AVentures Capital investment manager Bohdan Sviridov.

Investment manager of AVentures Capital Bohdan Sviridov

The market size bar is lower for smaller funds and angel investors.

However, a large market is not a guarantee of success. For example, Valery Krasovsky, co-founder of the Sigma Software company, angel investor, considers it inappropriate when startups call big market figures at a meeting with an investor without explaining why they will be successful on it.

"It does not give an understanding of whether this startup will be successful. Besides, you can never count on 20% or 50% of the market. You should count on a maximum of 4%. A too beautiful estimate of the target market is alarming," says Valery.

Team experience

The market changes, the product changes, but the team remains.

"In the early stages, the investor assesses the probability that this group of people can be realized. People are judged by their achievements: what this team has already done, who it worked with before, what image it has," said investor Ruslan Savchyshyn.

Investor Ruslan Savchyshyn

According to the managing partner of Genesis Investments Vitaly Laptyonka, the team is even more important than the idea.

"Many entrepreneurs worry that their competitors will steal their idea and implement it themselves. However, the idea itself is not important. It is important that it is implemented by a strong and balanced team that knows how to quickly adapt and test hypotheses, making effective decisions," he said.

Growth rate

A startup's high current growth rate demonstrates to investors that there is real demand for the product and the team is capable of attracting customers/users.

"Often, venture capital funds expect a growth in revenue from a startup, which signals that the startup is promising and worth digging deeper into its study. When evaluating real B2C startups that set new big trends (Clubhouse, for example), funds focus on the growth of the user base," Bohdan Svyridov explained.

Problem

It should be clear and concise so that it can be understood by the investor and the future client.

Often, venture capital funds try to get feedback from the client before making a decision. They ask how the product solved their problem and whether they would use it again. Also, high ratings from users on key marketplaces are important to them.

Metrics

It is important here:

• how much it costs to attract one user;

• how much, in the end, the startup earns from one user for the entire period of using the product;

• how quickly user engagement pays off;

• how well the company manages to retain users.

In B2C, indicators of user involvement in the product are also extremely important: how often a person uses the product and how much time he spends with it.

An investor will not give money to a startup if..

There is no faith in the team and the CEO

Angel investor Valery Krasovsky says that this is a subjective perception of people who make a startup. He is influenced by personal qualities and even the smallest details.

"Being a second late for a meeting is already a problem. When a person does not turn on the video during a call. When frankly not ready for discussion. You can afford it, but not in such cases. These are the basic principles of communication. In the case of SEO, it is important how well a person can express his thoughts. If I'm bored, then other investors will also be bored," Valery Krasovsky noted.

A complicated idea

You need to be able to explain the idea in three words.

There is no command

In some cases, startups come to an investor with only an idea and no team. The chances of success in such a situation are close to zero.

The same applies to the absence of SEO. But there are exceptions.

"When there is a serious technical prospect, we try to find a CEO, to help a super technical person implement his project," says Valery Krasovsky.

The desired valuation of the startup does not correspond to market realities

"When a fintech startup from Eastern Europe with a profit of $5,000 a month wants a valuation of $20 million at the seed stage, it quickly spoils the impression of the company's founders," says Vitaly Laptyonok.

They cannot answer the question

You have information - you manage the process. Answers: "I need to look at the records", "I need to consult with the team", etc. - will be a clear negative at a meeting with an investor.

They lie or hide information

Deception is not something to start cooperation with an investor from.

“Startup founders may exaggerate their metrics and achievements, their role at their previous workplace. Some say they ran a completely separate project when they were only one of 10 team members. And sometimes there are egregious cases. For example, a startup can hide the fact that they had a bad relationship with their former business partners or that they "fired" one of the founders," explained Vitaly Laptyonok.

The CEO does not work full time

"Startup is constant falls, constant meetings with partners, with the team, constant changes of direction. It is impossible to do part-time," says Valery Krasovsky.

Overconfident behavior when attracting investments

"We met a startup that had no sales and was just finishing work on the MVP. We turned him down and said it was too early for us at the moment, but we were open to talking again in the future. In response, we received dissatisfaction and a promise that they would not need money from us at later stages. We decided not to communicate with this team anymore," Vitaly Laptyonok recalled.

Vitaly Laptyonok, managing partner of Genesis Investments

Valery Krasovsky will also not invest in a startup with a CEO that "has a crown": "For example, I ask the CEO: "Why didn't you introduce this function that seems important to the client?" He answers: "No one needs this, we know." He responds to questions as if he knows everything in this world. When I ask a question, I want to hear a calm, thoughtful, reasoned answer. It is unacceptable that a start-up at an early stage is managed by a person who is arrogant."

The most common mistakes when pitching

• Explain your product and the problem it solves in complex terms. This is where the pitch begins, if the investor didn't understand what the startup does, he simply won't remember the rest of the presentation.

• Stretch pitches for 20-30 minutes and give long, vague answers to questions.

• Not remembering key business metrics for the past months or not knowing how much money needs to be raised in the current round.

• Spend a lot of time talking about the market and its size and much less time on the actual metrics of the startup and the presentation of the team.

• Ask the investor to sign a non-disclosure agreement so that he does not steal their idea.

• Consider that there is no competition in the product/solution. Alternative and legacy solutions are also competition.

• Use market indicators and estimates from public reports (eg Statista) instead of your own calculation. The latter shows that the team has thoroughly studied the market.

According to Valery Krasovskyi, during a pitch, investors see whether a person has undergone some sort of acceleration program. There they teach how to properly structure the pitch and bring forward what is most interesting to the investor.

Valery Krasovsky also considers it a mistake that startups often hide the problem that their product solves inside the presentation.

"You should always start from this. "Every startup makes their product not because they love it, but because they want to solve a real problem," Valery says.

Another gross mistake is not to return for repeated pitches if there is clear investor interest.

Co-founder of Sigma Software, angel investor Valery Krasovsky

"It is necessary to always give the investor updates. If a startup doesn't get a positive response the first time, an investor notices it as a market player anyway. You can understand that the investor is interested by the number of questions and the duration of the meeting. If the meeting was scheduled for half an hour, and the investor asked questions for 45 minutes, this is a great indicator. Or when the investor asks deep, detailed questions," Valery noted.

In such cases, even after rejection, you can periodically send news about your startup to the investor. For example, to notify about the release of a new interface or the registration of the ten thousandth user.

Portrait of a perfect pitch

The pitch should be informative. His main task is to motivate the investor in a short time to dive into a deep study of the company and the investment opportunity.

According to Bohdan Sviridov from AVentures Capital, for this you need to convey in an accessible language:

• what serious problem or need does the startup solve;

• how exactly he does it;

• what is the size of this market. Only target market size figures calculated by the startup team personally, not taken from Statista, are taken seriously;

• who are the direct and indirect competitors and what are the company's competitive advantages, why will customers choose this particular product;

• who are potential customers, how the company will attract customers and how it will earn from them;

• why this team is ideal to successfully solve/satisfy the chosen problem/need;

• what funding the team needs now and what it will be able to achieve with it.

The effect of the pitch can be enhanced by the shared values and goals of the investor and the startup. According to the study, for 2/3 of surveyed startup founders and venture capitalists, personal relationships are one of the most important factors when making a decision. And these relationships are established during the first meetings or calls.

Source: vector.media