Investing in startups allows one to observe at close quarters how different founders deal with opportunities and challenges. It allows you the opportunity to compare and contract, and therefore assimilate learnings and insights on what aspects might work better in what circumstances.
My work has given me the opportunity to engage closely with several startups. As I reflected on the year gone by, sharing some observations from these incredibly enriching engagements.
Clarity of vision, driven by purpose: Entrepreneurs who are guided by a purpose/mission that they are inspired by obviously have far more passion for their enterprise and therefore more tenacity to plough through challenging circumstances. On the other hand, founders who start ventures because of market opportunities often do not have the emotional incentive to plough through rough times, and tend to feel frustrated when things don’t go as planned (as they often do).
Being driven by passion is one thing. But, in my observation, founders who have a clarity of what they want to achieve in the long term can deal with short & mid-term ups and downs far better than those who may be driven by purpose but don’t (yet) have a clear view on what the long-term goal looks like.
And while the vision may change over time, having one in the beginning is, in my view, important as it prevents the short-term disappointments from turning into frustration.
I therefore encourage entrepreneurs to ‘see the film in their mind’ about what their business looks like in 10 years. (While most startups have granular clarity about the first couple of years, and aspirations for 3–5 years, one big learning for me is that having the founders aligned on a 10-year vision statement helps contextualize the short and mid-term journey far more objectively. IF the basis of their purpose is strong, the immensity of the long-term possibility can be super inspirational).
As an investor, knowing what drives the team and how they think of the long-term possibilities allows one to take a more pragmatic view of the opportunity that goes far beyond the pitch deck and excel sheets. While an excel sheet and the assumptions underpinning it are important, it is far more useful to understand what the team’s plans are if the assumptions don’t play out as expected. Founders who are guided by a purpose and have clarity of long-term vision usually have a more practical Plan-B.
Not all founders in a team are equally inspired by the same mission. And it is ok. In my early days as an investor, I used to seek commonality of passion among the founders in a startup. Over time I have realized that that is often not the case. Often one of the founders (and not necessarily the one with the highest equity in the venture) was driven by the purpose and helped the other founder(s) see the possibilities of wealth and glory in pursuing that purpose.
While all founders may not be equally passionate about the purpose, it is super important that they are fully aligned on the possibilities AND are excited with the potential. (And a few questions usually give me a sense of the founding team’s conviction. This is important for me because the business plans may or may not go as planned. What will keep the team going is their tenacity driven by the desire to make the imagined possibility a reality).
As an investor, between two startups in the same space competing for capital, I will give higher weightage to the team with more excitement and alignment on the long-term potential than the team with less of it even if their current traction, product and other aspects were better.
(Note: At Supply Chain Labs we invest in early-growth stage startups who have some initial in-market evidence of product-market fit and are building the foundation for scaling up. The point above may not be relevant if we were making investments in growth-stage ventures that are in planning for exponential scale.).
Ability to communicate well makes a huge difference. Founders who can contexualise their concept and tell their story well have a clear advantage than those who cannot. And while a founder who cannot inspire and communicate their concept and vision well may still find traction with customers if their value proposition is compelling and product is good, their inability to inspire hurts the venture in its ability to attract investors AND high-quality talent.
Communication skills can be learnt. But it needs acceptance that one needs help, and the humility to go through the process. Most entrepreneurs don’t consider this important.
From my experiences in the past, I am now biased to assess the communication skills of founders. (We have passed deals where the current dynamics were compelling, but we were not convinced about the entrepreneur team to inspire and attract customers, investors and talent. Right or wrong, only time will tell.).
Nimbleness is not about continuously adjusting the business plan. One of the most common mistakes entrepreneurs make is to make changes in strategy and direction too often and without giving enough time for one strategy to be implemented. Often this change is considered as being nimble and is assumed to be the nature of a startup. You are never sure if by changing often you are being nimble and agile, or if you are making the mistake of changing too soon without giving the concept/model the time it needs to settle into the market.
However, while it is possible for startups to change direction, it should be a very well debated and a thoroughly considered decision. And it needs to be planned well and, as importantly, communicated clearly to the entire team. The team must understand that this is a new approach / strategy. Else the team loses the respect for plans and goals.
Plan for the worst-case situation… not just the best case. Most entrepreneurs prepare business plan, which look at the most glorious of outcomes. While that is a possibility, it is prudent to think hard about what aspects could go wrong and think of plan to mitigate those disasters.
Founders who have a ‘what if’ plan are better prepared when required.
(I am often worried about founders who refuse to consider an adverse outcome than they imagine. This is because, in my observation, they find it difficult to cope with the emotional impact if their plan does not work out well).
Most entrepreneurs tend to underestimate the costs and time that they will require to meet planned milestones. Often entrepreneurs, enthused by their deep passion and conviction in the concept, expect things to happen sooner than it would, and they usually expect to achieve it with lesser resources and lower costs than it would require. Running out of cash because one planned incorrectly is the single biggest horror that a startup can face.
Good founders talk to customers. Often. Obvious as it may seem, it is surprising how few entrepreneurs have it on their weekly agenda to talk to customers.
Having a MIS mindset. Founders who have a MIS mindset tend to look at various aspects of the business far more diligently. I have observed that founders who send regular monthly updates are far, far, far more clearer about their business than those who do not.
Would love to hear your thoughts and observations.
Connect with me on LinkedIn on https://www.linkedin.com/in/prajaktraut/ if you have comments or questions about my views in this article or any of my other posts.
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