Building a Stable, Fundable Startup

How private equity investors evaluate tech startups, and what founders can do about it.

Since every tech startup is unique–

how do private equity investors (angels & VCs)

gauge which have potential, and which don’t?

Many investors, after years of interacting with

entrepreneurs and seeing thousands of new companies, chalk

it up to

“gut instinct”.

In a simple form, “gut instinct” can be spelled out as an objective analysis of the startup’s ratio of

assets to liabilities, and progress to backsliding,

over a period of time.

In this form of evaluation, there are 4 basic types of startup

companies– 3 of which are “unfundable”, and will largely be

rejected by investors.

Let’s take a look at each type…

Style 4: “Corporate”

This type of startup has a large assortment of resources & assets in the project (funding, talent, equipment), but low or little tangible progress to show for it.

Fatal flaws

•Lack of forward momentum•“Wasted” or “unused” resources•Top-heavy, resources managed unwisely•Lack of lean operating style•High burn rate

How to fix this

•Increase tangible progress•Re-allocate resources to departments that generate traction•Freeze spending, stop looking for additional resources•Impose lean operating constraints•Decrease burn rate by cutting excess staff/dead weight

Style 3: “Stagnant”

This type of startup has low resources & assets in the project (funding, talent, equipment), and low progress.

They’re not going anywhere.

Fatal flaws

•Lack of forward momentum•Waiting to have resources, before starting•Not using time/efforts wisely•Lack of action •Not completing tasks in critical areas that create a viable business opportunity•High likelihood of inexperience, 1st time errors

How to fix this

•Increase tangible progress•Do tasks that don’t require external resources•Begin tracking time/efforts •Create and execute a plan of action•Complete tasks in critical areas that create a viable business opportunity•Surround the team with experienced advisors, mentors, serial entrepreneurs

Style 1: “Sexy”

This type of startup has low resources & assets in the project (funding, staff, equipment), and high progress.

They’re kicking ass!

Fatal flaws

•Overachiever’s tendency toward burnout•Unnecessary conflict among teammates due to high levels of unmanaged stress•Diminishing rate of return after 55 hours/week of work•Not seeing the forest for the trees•Wildcard/high risk due to judgment errors•Undercapitalized, poverty-style operating

How to fix this

•Stabilize work pace, institute limits on time•Add to the team’s “morale bank” through positive team activities, clear communication•Cap amount of hours per week worked•Seek constant feedback from advisors, unbiased 3rd parties•Formalize strategy, avoid changes on the fly•Generate revenue, seek stabilizing resources

Style 2: “Stable”

This type of startup has high resources & assets in the project (funding, staff, equipment), and high progress.

Fatal flaws

•Getting comfortable, arriving at a plateau and failing to drive growth forward•Shifting backward into any of the other 3 categories•Getting cocky or overestimating abilities•Slowing down work pace•Spending irrationally or unnecessarily•Failing to monitor & manage problems

How to fix this

•Consistently move through growth stages•Course correcting to stable operating plane whenever problems arise•Maintain healthy sense of humility•Continuing an aggressive growth pace•Maintaining strategic, scrappy spending•Perceiving, correcting, and recovering from problem scenarios as they arise

The 3 “Unfundable” Styles(in order of attractiveness to investors)

1: “Sexy”: interesting or exciting to discuss, but too risky to be serious about.

3: “Stagnant”: no interest, not memorable, but nothing specifically wrong

4: “Corporate”: red-flag, avoid, high likelihood that large amounts of resources will be wasted/lost

The 1 “Fundable” Style

2: “Stable”: great momentum, trustworthy team, interesting market opportunity with good indicators that the startup will continue to grow in a financially viable way, and provide a good return on investment.

Ironically, these types of deals are the 2nd most “attractive”– they’re not as glamorous at first view, but the metrics, facts, and team are solid.

“But, I don’t want funding, why should I care?”

This is a completely valid question. The answer is simple:

Investors evaluate business opportunities for financial feasibility and long-term viability.

If the project you’re working on doesn’t stack up to these basic

standards, it probably has a very short shelf life.

So, why not spend your time & efforts in a project that has the maximum chance

for success?

By taking a little extra time to consciously choose the way in which you’re

operating your startup,

you can prevent errors and maximize the venture’s potential to grow and sustain itself over time.

One of the most exciting things about the work we do at Portland Ten,

is the opportunity to help founders see exactly where they are,

and shift their startup’s operating style to be healthy, financially feasible & stable over

time.

Best of luck to all founders in their startup efforts, from everyone at Portland Ten!

Growing ten $1MM startups in Portland by 10/2010.www.portlandten.com