Building A Stable, Fundable Startup

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, 1 st 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 3 rd 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 2 nd 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

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Building A Stable, Fundable Startup

by portlandten on Oct 02, 2009

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Building A Stable, Fundable Startup — Presentation Transcript