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