Early-stage investors (disclosure: I'm one of them) are famous for saying 'no'. Entrepreneurs seeking capital will spend hours building PowerPoint decks, crafting emails and asking friends for introductions to prospective investors, only to receive an inbox full of one-line 'thanks but no thanks' replies. And that's when they get a reply at all. How do investors make these snap decisions? Aren't they interested in innovation? Don't they get paid to take early-stage risk?
A new study from the Startup Genome Project shines an interesting new light on the question of why certain startups succeed and others struggle. Not coincidentally, their answers read like a playbook of early-stage investing do's and don'ts. If you're planning to raise money for your startup -- or if you write angel checks yourself -- I strongly recommend you read the whole study. As a preview, here are just a few of the study's conclusions and how they map to common decision-making patterns among early stage investors (myself included):
- Startup Genome: "Solo founders and founding teams without technical cofounders have a much lower probability of success."
- Investors: "Don't invest in software companies that don't have hackers at the heart of the org and cap table"
- Startup Genome: "Solo founders take longer to reach scale compared to a founding team of two or more, and they are half as likely to adjust their strategy based on market feedback"
- Investors: "Don't invest in solo founders (unless they're so extraordinarily mature and capable that you believe they can mitigate these risks)"
- Startup Genome: "Balanced teams with one technical founder and one business founder raise more money, have more user growth and are less likely to scale prematurely than technical or business-heavy founding teams."
- Investors: "Every team needs a healthy mix of Hackers and Hustlers"
- Startup Genome: "Most successful founders are driven by impact rather than experience or money."
- Investors: "Invest in passion, not greed"
- Startup Genome: "Startups that haven’t raised money over-estimate their market size by 100x and often misinterpret their market as new."
- Investors: "I don't believe your hockey stick. Tell me why what you're doing is truly disruptive."
- Startup Genome: "Startups need 2-3 times longer to validate their market than most founders expect. This underestimation creates the pressure to scale prematurely."
- Investors: "You're not raising enough."
Investment decisions feel subjective because investors rely on their own entrepreneurial experiences -- and the lessons learned from the companies they back -- to develop highly individualized patterns of startup success and failure. Whenever they evaluate a new deal, they run the facts supplied by the entrepreneur about team, market, opportunity and approach through their mental database of patterns, looking for areas of fit and divergence. When they see a strong fit with their patterns of success, they get out their checkbook. When they don't (which is most of the time), they write one of those one-line emails and move on to the next deal.
I was fascinated and delighted to see so much overlap between the conclusions of the Startup Genome study and the heuristics of the early-stage investors I know and respect. Fascinated because I was skeptical that a quantitative study could discover much about as subjective and personal a pursuit as early-stage investing. And delighted because -- if you believe the results of the study -- there really are objective patterns of success and failure that any entrepreneur can also apply to increase his or her odds of success. And increasing your odds of success is something that both entrepreneurs and investors can get behind.
You can learn more about the Startup Genome Project's methodology here and download your own copy here.
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