I would like to dedicate this editorial to some reflections on the subtle art of “screening start-ups”. My reasons for doing so are twofold; I find that start-up teams are often frustrated by investors’ rejections. Furthermore, many investors seem to be interested in screening considerations of other investors.
First remark: Investors do not look for the “perfect” start-up.
It is a rather bureaucratic perspective to think of the screening process as some sort of check-list approach where the start-ups can score points for meeting certain criteria (e.g. team, product, market) and then eventually receive money if their overall-score is above the XYZ line. The reality is different. As Marc Andreessen once put it in one of my favourite Stanford University lectures
: “[Investors] invest in strengths, not in lack of weakness.”
In other words: We are not looking for companies that have no obvious weakness and therefore presumably a good chance of survival. This is why you can and may be rejected even with a perfectly thought-through presentation that covers all key aspects of your business – sorry. We look for companies that have one (or more) aspects to them that are unique and (!! very important !!) that seem to have the potential to make this particular company a super successful outlier. Many of the latter have significant shortcomings, which we may accept in light of other outstanding strengths of the company.
Second remark: Professional investors screen systematically.
Notwithstanding the first remark, professional investors will screen start-ups systematically. If an investor questions your team mostly about the product, you are probably talking to either a company builder or a rookie business angel. A professional investor will always try and understand all basic aspects of your business, i.e. team, product, market, competition, business and sales model plus strategy, financial plan, investment conditions, long-term aspiration & strategy. But he will not necessarily expect you to have a 100% water-proof answer to everything because he accepts that things may change over time and he is aware of the fact that he is looking at your company today, i.e. in an early development stage, where even you, the founders, may not see all aspects that are relevant to your business.
Third remark: Different investors screen differently.
This may sound obvious but founders often seem to neglect the advantages of a careful investor selection process (and then fail to understand reasons for rejections). It is just a matter of fact that different start-up investors reject the same start-up for different reasons. Generally speaking, a private investor will focus on companies that fall within his investment scope and have the potential to pay back his investment with an attractive multiple within 5-8 years. Government-funded start-up investors may have a broader investment scope to begin with and can be slightly less concerned about capital pay back. They consider other aspects such as: Is the company young enough to fit my program, was it established in our target region, did it already receive funding by other government agencies, what is the company’s technology base etc. To founders, this means: Know your game and you will hunt more successfully.
Fourth remark (part 1): Investors are right.
This may be hard to digest, but if you consider an investor working with promising entrepreneurs and start-ups every day for many years and on a professional basis, and your start-up is rejected by this investor, then it seems reasonable to assume that his feedback, especially when it comes to certain basic strategies or conceptual ideas of your company, may contain some food for thought.
Fourth remark (part 2): Investors are wrong (sic!).
This contradicts the previous paragraph, but it is true nonetheless, which may be nice to note for founders: Investors are wrong fairly frequently. The most honest statement in this context is made by our esteemed colleagues at Bessemer Ventures, who display some (?) of their worst screening decisions on their website
. In other words: As mentioned before, you should consider the feedback of an investor carefully as it may contain some valid points. However, you should also have the guts to stick to your vision, because at the end of the day, the investors do not get it right all the time…
Fifth remark: Screening is more than a professional “to-do item”.
Many investors seem to believe that screening is done to select (or reject) certain investment targets. But it does not end there. Another aspect is, that the screening provides the basis for the due diligence, during which the investor takes a much closer look at the findings from the screening and tries to thoroughly understand key risks and key strengths of the business. Another aspect is, that screening and due diligence together will have an impact on the management of the investment by the investor. They mark the areas which the investor will observe closely during the investment phase as they are (or can be) critical success factors for the company.
This concludes the July editorial – enjoy the rest of this month’s newsletter!