13 Apr 2016

What do investors look for in the startups they back? An angel’s perspective.

By Guest

A couple of weeks ago, BGV mentor and angel investor Jon Drori gave a talk to the startups at BGV on what he looks for in the founders he backs – and it’s not all about the numbers. In this guest blog Jon shares the top 10 extra things he looks for that signal a great investment.

I was asked by Bethnal Green Ventures to write something about what I look for when I’m investing in startups on top of all the standard, but important things like sustainable competitive advantage, barriers to entry for competitors, patents etc. Below you’ll find the top ten extra things I look for in the venture teams I back.

Please remember though as you’re reading this that I’m just one person, full of faults and foibles, like every other human being. I’m no expert.

1 – Honesty and openness

I would far rather someone say they need help, or that they’re unsure, than try to string me along. Really.  I know this isn’t what you’d believe watching The Apprentice but life is really much better if you confront as early as you can the things that need fixing and don’t try to pull the wool over your own eyes or anyone else’s.

2 – The founders are surrounded by people who will give them honest feedback

You don’t want to find yourself in the company of people who agree with you all the time.

You know how it is when you check out of a hotel and as you’re handing over your credit card they ask “how was everything?”, to which you always say “fine thanks”, even if you didn’t think it was that good and you won’t go again. This does not want to be the situation you find yourself in.

Make sure that you solicit the truth from others. You want to be asking ‘what are three things that we could improve upon’ not ‘how was everything?’

That said…

3 – The founders actually get on

Having founders fall out is a really simple way to lose money. One of my criteria is that the team I’m investing in form a stable, consensual working relationship. They’ll challenge each other along the way but not to the point where they fall out or split up.

4 – They don’t under capitalise their business

If you’re new to startups you’ve probably created a spreadsheet that helps you work out how much money you’ll need to get things set up until you’re profitable. You might look at that figure and think, ‘Wow, that’s a heck of a lot of money and nobody will take me seriously.’ At that moment, you might delude yourself or set out to massage the figures and if you’re not careful you can make some very optimistic assumptions about what you can accomplish in a short period of time. Don’t fall into that trap!

You might get the money, but you’ll annoy the investors who see through this and walk away, and you’ll annoy the investors who believed your figures in the first place. Which leads nicely to number 5…

5 – They aren’t overly optimistic

Pretty self explanatory really. Everything always, always, always takes longer than you think. Build that in. It’s better for investors to have nice surprises rather than nasty ones.

6 – They try to avoid surprises

I’ve found that the companies that seem to do well are very often the ones with the best communication. They’ll provide a simple dashboard of company metrics with a straightforward commentary on the good, the bad or the ugly all on one page (or its equivalent in Excel).

7 – They ask for help

It actually gives me confidence when there’s a headline in their communication with investors asking for help, whether contacts or advice. Everybody’s human, and we all screw up, but whatever the reason, come clean and ask for help the second you realise you need it.

8 – There’s an obvious way for founders to let go

Founders of startups tend to be good at, well, founding startups. Sometimes I wonder if founders are going to try to stay and cling on when there might be someone better to take the company to the next level. It’s usually best for a founder to do what they do best, keep some increasingly valuable shares and perhaps an advisory interest and go off and start something new.

9 – They have empathy

I find some of the most successful entrepreneurs are really able to understand how and why other people feel the way they do. If they can understand my point of view as an investor, I feel like they are more likely to be able to get into their customers’ heads as well.

10 – They aren’t afraid to ask dumb questions

Pretty self-explanatory really. Don’t assume that everyone except you knows the answer. It sends a good signal that you want to learn.

So that’s it! I hope you found these tips useful and I wish all those reading this who have ventures or are thinking of starting ventures the best of luck. Growing a company, employing people and providing a genuinely useful product or service – it’s a wonderful and fulfilling thing to do.

@jondrori (contact via Bethnal Green Ventures)