Beware of experts bearing formulas

Well intentioned illusions

The Startup world is home to many well intentioned illusions. One of these is the concept of "investor ready." This apparently attractive phrase is dangerous because it misleads about investor priorities, it misunderstands the relationship between investors and companies and it misrepresents the role of advisors.

Let me explain. If you search the Internet you will find literally thousands of blogs and articles by angels, VCs and investors of all types setting out their investment priorities. Investor ready is never on the list. There is a very simple reason. Investors want to invest in a great business. The common factors - team, product/ market fit, growth potential etc - are all about being a great business.

Investors and Startups need each other

Investor ready also implies, even assumes in some cases, that Startups are supplicants aiming for the grace and favour of investors. This is wrong. Investing in a Startup is a partnership. The investor has scarce resources of money and expertise but the Startup also offers something rare, great people and an innovative business. Investors need Startups as much as Startups need investors.

A few things you need to know

A mini industry has grown up around matching these needs. If you are a Startup looking for money, you will encounter this sector of the economy sooner or later. Here are a few things you need to know:

• Investors have many different preferences (pre or post revenue, tech or not tech, experience of the team etc). There is no right answer for investors, you just need to find the people who are looking for thing which line up with your business.
  
• Every investor will talk about the importance of team. You are definitely not 100% sure that you are great so this can seem like an insurmountable hurdle. In practice you need to convince the investor that you know what you are doing and that you are passionate about doing it. This is about personal interaction and you will work with some people and not with others. This is fine, just don’t take investment from someone who doesn’t get it.
  
• Investors want to know how you intend to make money. This is the focus of much external advice but there is no one answer. Different investors have different timescales and look for varying levels of certainty. I think they all have three things in common: know there is a revenue model there somewhere; show you have the ability and the desire to sell your product; and understand the model for scaling sales (e.g. advertising, word of mouth, sales force) and the future cost implications of that model.
  
• Everyone wants to be sure there is a market for the product, sometimes called product/ market fit. Bold statements from Gartner or IDC about the value of, for example, the mobile advertising market do not prove there is a market for your idea. For your sake as well as the investors, make sure you carry out proper market research. This is not just about having an impressive slide for the pitch deck.
  
• Advisors want to help you get this right. You need to listen to this advice and use it as best you can. But it is advice not instruction. If you simply do what you are told by advisors they will keep providing advice until your business disappears and is replaced by a “perfect pitch.” I have seen this happen and it ends badly.
  
• Many advisors also fulfil an undeclared role as middlemen. Sometimes they are not even aware of this themselves although usually it is an unstated but vital part of their business model. The Internet is pretty good at squeezing this type of activity but it is part of the grit in the machine of commerce so it will never completely disappear. You just need to be aware when this is happening so you understand the real relationship you have with the people concerned.
  
• If you want to raise money, you do need to spend time on this, probably a lot of time. Remember however that it is a time capsule process, it is not a value adding activity in itself. 
  

Hold onto your dream

The most essential thing is not to lose yourself and your business in the “investor ready” process. I have seen many pitches and business plans (which is just another pitch remember) refined and improved by expert advisors which are designed to answer every question in the book. Unfortunately this never works. Once investors see the pitch sooner or later they will ask the question about the business fundamentals that is not in the book and the founder will be exposed. Your job in the investor ready process is just another pitch. It is not to change the market, the product or the revenue model to meet someone else’s expectation. 

Securing investment is an exciting moment for any business. Remember you are an equal partner in that investment and what you bring is the idea and the passion. Lose these and the investment will be and for you and the investor. Keep them and we will all have fun.