Starting a company can be an act of naiveté, unbridled optimism or, more often than not, both. Despite having been a founder or early executive at five companies over the past 20 years, I remain surprised at how difficult it is to get past the initial early startup stage.
Every company faces its own unique set of obstacles, some unexpected until they confront the founding team seemingly out of nowhere. Whether it is unpredictable market conditions, a lawsuit from a relied-upon partner, or new legislation that prohibits the most profitable line of business, “expect the unexpected” has never been a more appropriate phrase than in the world of startups.
I have been fortunate to survive a career as a startup entrepreneur with only minor scrapes and bruises. I beat the odds and also enjoyed a few exits, which allowed me to sit on the other side of the entrepreneurial table as an angel investor.
Like many angel investors, I started my investing career with unbridled optimism. After placing a few small unsuccessful bets, I stumbled upon some universal truths that all angel investors uncover: Good ideas don’t always make good businesses. Execution, timing and luck matter. And entrepreneurs are born, not made.
Experience and introspection have presented a few lessons that have made me a more successful angel investor and serial entrepreneur.
1. Never take a rejection to invest personally.
In the early days of every entrepreneur’s journey, rejection is the norm. Most seasoned entrepreneurs can look back on a long career and share how many times they were told no for some of their most successful businesses. Similarly, many long-term investors will have stories about how they turned down Amazon or Google when it was operating out of a garage.
As my investor self tells my entrepreneur self, if you get a lot of rejection, take a long, hard look at your business model. If it’s a bad idea, pivot or move on. If it’s a good idea, someone else will see the vision. Entrepreneurs must maintain conviction and be unyielding evangelists, which makes those early slammed doors in the face even sweeter in the end.
2. Put together a winning team.
It’s a well-worn trope in startup investing: Bet on the team. Ideas are common, and to paraphrase prolific angel investor David S. Rose, you are better off investing in an amazing leader with a mediocre idea than a mediocre leader with an amazing idea. Not every entrepreneur is strong when building their first startup. I cringe thinking back on how much time I spent obsessing over the price of SWAG pens handed out at the first conference I attended peddling my startup.
Repeat entrepreneurs have the benefit of experience and learning from painful mistakes. New entrepreneurs can overcome this learning curve by securing a strong team around them. Recruiting and enrolling are essential qualities for any startup executive to possess.
As an angel investor, I am encouraged to hear that leaders at a startup have spent quality time developing deep bonds and learning one another’s work styles, strengths and opportunities. Some repeat founding teams like to call it “putting the band back together,” which almost always ensures beautiful music will be played.
3. Solve a real problem.
This may sound like an obvious goal, but many times entrepreneurs get excited about a feature or functionality that they think sounds innovative or transformative. It may very well change the industry, but if it doesn’t solve a real problem, it isn’t likely that anyone will care or use it. Even if the product is free, customers have to spend time to adopt it, and mindshare will not be devoted to any new task without a compelling reason.
As an angel investor, I have seen too many decks that propose a business solution that either doesn’t articulate the problem being solved or purports to solve a problem that the customer doesn’t know they have. A startup can educate customers, but doing so delays growth and requires both a comprehensive and defensible plan.
4. Treat every dollar as if it is your own.
If you have ever bootstrapped a business, you know how difficult it is to come out of pocket to fund staff, rent or marketing. Bootstrapped entrepreneurs have a tougher time scaling because there may be little, if any, room to make mistakes. Once capital has been raised, some startups leaders start to spend like drunken sailors. To go from less than $ 10,000 in the bank to seven figures overnight can be intoxicating. The combination of other people’s money and an abundance of it changes the approach to how founders spend, for better and for worse.
As an angel investor, I want to believe that my investment is going to be spent on growing the business and getting to the next stage. As an entrepreneur, I know that sometimes a business must take two steps forward and one step back. Not every spend will deliver the results desired, and scaling a business inevitably means that mistakes will be made. That said, if an entrepreneur takes the same care and thought in making financial decisions with my money as they do with their own, I consider a good portion of their fiscal responsibility met.
There is no magic formula for angel investors to identify great investments, or for entrepreneurs to ensure that their startup will be a success. Rather, investing and starting companies is like riding a bike: You are wobbly at first, but with time you find your balance, and then it is smooth riding until the unexpected hits. The secret is to expect it.