While these tips can apply to other sectors, the mobile/web space is what I know so my comments are mainly applicable there.
Besides investing in Europe, together with 88MPH, I have invested in 8 Kenyan mobile/web start-ups since August. My observations are thus derived from both the European and Kenyan start-up scene.
Find a potential investor
Get someone in your space. Has the investor you want to contact invested in tech before? If not, then he most likely will not understand what you are doing and you are not likely to get any funding before you have proven your business model and have some traction.
Look at the range the investor invests in. Again, if you are in a phase where you don’t have a proven business model or traction, then investors investing over a €1 million are not very likely to fund you. The reason they have this range is that they simply don’t have time to invest smaller amounts. If you are 5 investors that have to invest €50 million, making 500 investments of €100k is impossible.
88MPH, as a seed fund, builds relationships with later-stage investors. We know what they invest in and within what range they invest. So when some of our start-ups are showing progress and are in the right phase, we start talking to investors we know who have an interest in that space and the right investment range.
If you don’t have traction or a proven business model
Last time I was in the US speaking to people from TechStars. I asked if many of their 800 applicants have the same idea. They said it happens all the time. So then they need to try to figure out what team are most likely to be able to execute. Therefore early stage investing is more about hiring people then investing in an idea. I’m sure that you have heard it a 1000x, but in all the pitches I hear no one talk about why they are the ones that will be best at executing this idea.
If you have a good idea and nothing else, then investors will ask themselves, Why are you be able to execute it better then the next guy? whos come up with the same idea or all ready have? This is where it boils down to your team. If you can’t answer this question with confidence, you are not ready.
What if you don’t have a very convincing team
Then build a nice product and LAUNCH it and, even better, get a bit of traction. This could get you a sit down with the right investor who may be able to help connect you with people who will complement you, and make your team fundable.
This is one of the things we try to do at 88mph. One tech guy may have built something we like, in a space we believe in. We then try to team him up with other people that have good domain knowledge or skills that complement him well. We then add some cash, office, legal structure, mentorship, operational help, and then a company is born.
Investors don’t fund projects they fund people.
During our IPO48 events, and in general, I meet entrepreneurs that have multiple projects and they are just seeking funding for one of them, but will continue to work with the others on the side. This may be fun for an entrepreneur, but only idiot investors will invest in a setup like this.
As I said it’s about the team. So part-time entrepreneurs are not likely to be winners and investors also don’t want to be in a situation where, next month when you come up with another idea, you leave the project he just invested in. To me this is the greatest turnoff. So before you go talk to investors then you have to be ready to drop all other things if you get funding.
Who owns what of the company?
Many times I see start-ups where they have a ownership structure that makes them non-fundable from day one. For some reason the shares have been divided in a way where I can see that a key person in the start-up has too few shares, so down the track his incentive will not be there.
I have also seen cases where a girlfriend even got some shares or some uncle that has offered some advise while intoxicated, or an even an entire family had become a shareholder. This one is a very hard for entrepreneurs to get right.
One way of dealing with it is to be upfront with your co-founders. Talk about what to do if an investor doesn’t like the composition of the team or if there is a conflict in the team about shares, then how will you solve it. Can people buy each other out? So far almost 50% of the start-ups we have invested in have had big founder issues. And it’s a major reason why start-ups fail. To avoid this then talk about it upfront, and write it down, especially if you are good friends.
If you have questions that you would like me to answer, feel free to post them in the comment box and I will try to address them in future post.
